LV Thạc sỹ_Improve consumer lending at Techcombank

The research is divided into 3 chapters as below: Chapter 1: Theoretical background of consumer lending This charter includes theoretical background, it presents concept of consumer lending, characteristics of consumer lending and consumer lending quality as well as factors influencing of consumer lending quality. It also gives out indicators to assess consumer lending quality. Thats why this part is the framework for studying of other chapters, including chapter 2 and 3. Chapter 2: The current situation of consumer lending quality at Techcombank This chapter gives an overview of Techcombank with analyzing and assessment of current situation of consumer lending quality via indicators then points out new findings. Chapter 3: Solutions to improve consumer lending at Techcombank This chapter would propose solutions to further improve consumer lending quality at Teachcombank. These solutions were executed based upon studying both theoretical aspect and real assessment of consumer lending quality. The author expects that these solutions can help improve the consumer lending quality at Techcombank if applied.

MINISTRY OF EDUCATION AND TRAINING NATIONAL ECONOMICS UNIVERSITY

NEU BUSINESS SCHOOL

DUONG THI HONG NGAN

IMPROVING CONSUMER LENDING AT TECHCOMBANK

MASTER OF BUSINESS ADMINISTRATION THESIS

60.34.05

Subject: Improve consumer lending at Techcombank

Techcombank is one of leading commercial banks in Vietnam with its orientation to theretail market in which consumer lending accounts for majority The bank has been aware ofconsumer credit market for years The bank has joined in this market officially since 2000and obtained certain achievements However, parallel to its success, the bank still has toimprove its service quality in order to keep current clients and attract more customers

Nonetheless, the benefits are shrinking due partially to strict requirements set bythe Government and mainly to the harsh competition in consumer lending market whenthere are more banks to jump into fray thanks to its attraction and profit; foreign banks arenot an exception Therefore, Techcombank, in the one hand, gets less benefit from thismarket and on the other hand, faces with tough and fierce condition

Since the potential in consumer lending market and the difficult conditions thatTechcombank is facing, consumer lending is chosen as the topic for this MBA thesis

The research aims to conduct consumer credit quality studying in Techcombank and thenconclusions and recommendations as well are drawn in order to improve Techcombank’sconsumer lending quality.

3 RESEARCH OBJECTIVES

The major objectives in the research are to:

- Systemize theoretical framework of consumer lending, benefits of consumerlending, consumer lending quality and factors giving impacts on consumer lendingquality

- Give out indicators to evaluate consumer lending quality

- Analyze and evaluate current situation of consumer lending quality atTechcombank based on given indicators

- Propose solutions of improving consumer lending service quality at Techcombank

4 RESEARCH QUESTIONS

In order to achieve the objectives of the thesis, the author will try to answer the followingquestions:

- What is consumer lending and benefits of consumer lending to a commercial bank?

- What is consumer lending quality and what are indicators to assess consumerlending quality?

- How is consumer lending quality at Techombank?

- How to improve consumer lending quality? Which are the best ways to improveconsumer lending quality at Techcomank

5 RESEARCH METHODOLOGY

The research methodologies used in the thesis are qualititative and quantitative analysis.Moreover, the data provided within this thesis is collected from:

Secondary data

- Bank’s financial reports and annual report

- Credit documents of Techcombank

- Legal regulations and documents about bank

- Magazines, textbooks, internet and other media measures which can providenecessary information for the research

Primary data

After using secondary data, primary data is collected as follows:

The author uses depth-interview and questionnaires method to get information and thenapplied qualitative method to analyze Depth-interview method is conducted through creditexperts/managers and customers with questions to be prepared in advance Contents of thequestions focus on their appraisals about consumer lending quality performance, how toimprove its performance Questionnaires results are collected via survey with 30questionnaires from 30 customers using consumer lending services at Techcombank, thecontents of questionnaires shows customer’s satisfying level about consumer lendingservice quality From that the thesis proposes solutions to improve consumer lendingquality at the bank

6 SCOPE OF RESEARCH AND LIMITATIONS

Scope:

This research made study on consumer lending service quality at Techcombank in theperiod from 2007-2009

Limitations:

This research focuses on consumer lending service at Techcombank and the data is

2007-2009 It also gives out solutions to improve consumer lending quality at Techcombankonly, not for the whole industry and other banks or other services at Techcombank Inaddition, this thesis also lie on its sole research on the consumer lending business environment, instead of comparing working model on consumer lending of Techcombank to those of other banks who have succeeded in this field Then this research serves for Techcombank and in case it isapplied for another organization, it need further and supplemental study

7 RESEARCH STRUCTURE

The research is divided into 3 chapters as below:

Chapter 1: Theoretical background of consumer lending

This charter includes theoretical background, it presents concept of consumer lending,characteristics of consumer lending and consumer lending quality as well as factorsinfluencing of consumer lending quality It also gives out indicators to assess consumerlending quality That's why this part is the framework for studying of other chapters,

including chapter 2 and 3.

Chapter 2: The current situation of consumer lending quality at Techcombank

This chapter gives an overview of Techcombank with analyzing and assessment ofcurrent situation of consumer lending quality via indicators then points out new findings

Chapter 3: Solutions to improve consumer lending at Techcombank

This chapter would propose solutions to further improve consumer lending quality

at Teachcombank These solutions were executed based upon studying both theoreticalaspect and real assessment of consumer lending quality The author expects that thesesolutions can help improve the consumer lending quality at Techcombank if applied

Supervised by: Dr Dang Ngoc Duc

Student: Duong Thi Hong Ngan Class: EMBA 7B

NEU Business School

HANOIanoi - , 2010

TABLE OF CONTENTS

MINISTRY OF EDUCATION AND TRAINING 1

NATIONAL ECONOMICS UNIVERSITY 1

NEU BUSINESS SCHOOL 1

1

DUONG THI HONG NGAN 1

Supervised by: Dr Dang Ngoc Duc 5

Student: Duong Thi Hong Ngan 5

Class: EMBA 7B 5

NEU Business School 5

HANOIanoi - , 2010 5

LIST OF TABLES

MINISTRY OF EDUCATION AND TRAINING 1

NATIONAL ECONOMICS UNIVERSITY 1

NEU BUSINESS SCHOOL 1

1

DUONG THI HONG NGAN 1

Supervised by: Dr Dang Ngoc Duc 5

Student: Duong Thi Hong Ngan 5

Class: EMBA 7B 5

NEU Business School 5

HANOIanoi - , 2010 5

MINISTRY OF EDUCATION AND TRAINING 1

NATIONAL ECONOMICS UNIVERSITY 1

NEU BUSINESS SCHOOL 1

1

DUONG THI HONG NGAN 1

Supervised by: Dr Dang Ngoc Duc 5

Student: Duong Thi Hong Ngan 5

Class: EMBA 7B 5

NEU Business School 5

HANOIanoi - , 2010 5

My thanks are also given to my friends and teachers in National Economics University –Business school They have helped me so much during this course.

I am particularly grateful to my colleagues in Techcombank for their kindness, constructivesuggestion for my thesis

Lastly, I would like thanks to the encouragement to tolerance of my friends, my familywho contributed many valuable ideas that helped me completed this thesis

Techcombank is one of leading commercial banks in Vietnam with its orientation to theretail market in which consumer lending accounts for majority The bank has been aware

of consumer credit market for years The bank has joined in this market officially since

2000 and obtained certain achievements However, parallel to its success, the bank stillhas to improve its service quality in order to keep current clients and attract morecustomers

Nonetheless, the benefits are shrinking due partially to strict requirements set bythe Government and mainly to the harsh competition in consumer lending market whenthere are more banks to jump into fray thanks to its attraction and profit; foreign banksare not an exception Therefore, Techcombank, in the one hand, gets less benefit from thismarket and on the other hand, faces with tough and fierce condition

Since the potential in consumer lending market and the difficult conditions thatTechcombank is facing, consumer lending is chosen as the topic for this MBA thesisThe research aims to conduct consumer credit quality studying in Techcombank and thenconclusions and recommendations as well are drawn in order to improve Techcombank’s

consumer lending quality.

3 RESEARCH OBJECTIVES

The major objectives in the research are to:

- Systemize theoretical framework of consumer lending, benefits of consumerlending, consumer lending quality and factors giving impacts on consumerlending quality

- Give out indicators to evaluate consumer lending quality

- Analyze and evaluate current situation of consumer lending quality atTechcombank based on given indicators

- Propose solutions of improving consumer lending service quality at Techcombank

- How is consumer lending quality at Techombank?

- How to improve consumer lending quality? Whichat are the best ways to improveconsumer lending quality at Techcomank

- Bank’s financial reports and annual report

- Credit documents of Techcombank

- Legal regulations and documents about bank

- Magazines, textbooks, internet and other media measures which can providenecessary information for the research

Primary data

After using secondary data, primary data is collected as follows:

The author uses d in depth-interview and questionnaires method to get information andthen applied qualitative method to analyze Depth-interview method is conducted throughcredit experts/managers and customers with questions to be prepared in advance.Contents of the questions focus on their appraisals about consumer lending qualityperformance, how to improve its performance Questionnaires results are collected viasurvey with 30 questionnaires from 30 customers using consumer lending services atTechcombank, the contents of questionnaires shows customer’s satisfying action levelabout consumer lending service quality fFrom that the thesis proposes solutions toimprove consumer lending quality at the bank

6 SCOPES OF RESEARCH AND LIMITATIONS

Scope:

This research made study on Studying consumer lending service quality at Techcombank

in the period with the specifies:

The time research is a period from 2007-2009

The space scope: Researching factors that affect consumer lending quality at Techcomank

Limitations:

This research only focuses on consumer lending service at Techcombank and the data is2007-2009 It also gives out solutions to improve consumer lending quality atTechcombank only, not for the in a whole industryeconomy and other banks or otherservices at Techcombank In addition, Limitations of thise thesis also lie on its sole research

on the consumer lending business environment, instead of comparing working model on consumer lending of Techcombank to those of other banks who have succeeded in this field Then

> So this research serves is for Techcombank and in case , if it iswere applied for another

organization, it need we should take further and supplemental study.

7 RESEARCH STRUCTURE

The research is divided into 3 chapters as below:

Chapter 1: Theoretical background of consumer lending

This charter includes theoretical background, it presents concept of consumer lending,characteristics of consumer lending and consumer lending quality as well as, factorsinfluencing of consumer lending quality It also and it gives out indicators to assessconsumer lending quality That's why this part These factors will be ais the framework forstudying of other chapters, including chapter 2 and 3

Chapter 2: The current situation of consumer lending quality at Techcombank

This chapter gives an oOverview of Techcombank together with analyzing andassessment of current situation of consumer lending quality via indicators then from thatpoint gives out new findings

Chapter 3: Solutions to improve consumer lending at Techcombank

This chapter would propose solutions to further improve consumer lending quality

at Teachcombank These solutions were executed based upon studying both theoreticalaspect and real assessment reality of consumer lending quality The author expects thatthese Implementing sosolutions can help improve thelutions enable consumer lendingquality at Techcombank if applied.will be improved best

CHAPTER 1: THEORETICAL BACKRROUND OF CONSUMER LENDING QUALITY

1.1 Consumer lending Overview

1.1.1 Definition of consumer lending

Many definitions of consumer lending are available but all of them have a common ideathat consumer lending is intangible and simultaneous consumption Some of consumerlending definitions are as follows:

- Consumer lending is a direct or indirect form of credit financing that supports forcitizens’ demand (individuals and households) for their expenditure of such as housing,transport, car or services of education, health, tourism and so forth before they will haveadequately accumulated

- Consumer lending is sometimes called retail lending and both of them refer to secured

or unsecured loans, including nearly all lending other than that of mortgages orcommercial loans Consumer lending is offered for cars, boats, home equity loans or lines

of credit, signature loans, and even certificates of deposit, stocks and mutual funds

- Consumer lending includes loans for other personal financial needs, including thegranting of overdraft lines of credit and the purchase of consumer loan accounts fromretailers or other lenders

- Consumer lending is also understood that banks can offer a completed suite of lendingproducts for retail customers These include personal loans, vehicle loans, mortgages,home-saving products, top-up loans, loans with flexible repayment schedules, equated-installment loans

- The division of retail banking that deals with lendingmoney to consumers This

includes a wide variety of loans, including credit cards, mortgage loans, and auto loans, and can also be used to refer to loans taken out at either the prime rate or the subprime

rate

1.1.2 Characteristics of consumer lending

High interest rate: Scale of each loan is small and cost of loan is high, so interest rate of

consumer lending is higher than other loan types

Depending on economic cycles: When the economy prospers, living standard is

improved, demand for consumer lending increases, especially on holidays, the demandfor shopping goes up and as the results, the demand of loans may climb accordingly;

Depending on income and education: Demand for customer lending depends on strictly

on income and education level Specifically, those who have higher incomes tend toborrow more than their annual income For them, borrowing as a tool to achieve thedesired standard of living rather than an option used only in emergencies, customersregard it as a loan flexibility to spend money when they have accumulated capital ofmedium or long term investment

High level of risk: Although its procedure is quite simple, however, after supplying loan

for customers, if the bank doesn’t control strictly, it will causes high risk for the bank Ifthe borrowers die, ill or lose job, the bank will be difficult to recover debt

Mainly individual customers: Customers are mainly individuals

Difficult to assess customers characteristics and condition: Dignity, legal status of

customers is quite difficult to determine, based mainly on assessment, feeling andexperience of credit officer, so assessing loan is quite sensitive

Difficult to assess customer income: Verification of income and expenditure of customers

is difficult, often based on salary, accumulation It is not clear evidence

1.1.3 Classification of consumer loans

1.1.3.1 In terms of mortgage

Loans with collaterals:

These loans are secured by collaterals A collateral loan has usually interest rates lowerthan other loans because the value of the mortgage somewhat make risk reduced.However, banks accept only in the case of assets to ensure that banks can sell to pay dept

A collateral loan often is long term and payment of debt periodically It is similar to

installment loan Banks usually lend customers based on the borrowers will pay a fixedmonthly amount in a period of 5-20 years, depending on specific conditions.

The principal of loan will be amortized The mortgages that a bank may use such ashouses, cars, machinery, rights to property and other assets owned by customers or otherpartners guarantee

Loans without collaterals

This loan doesn’t need to have pledges or mortgages; it is based on the prestige ofcustomers When the bank uses this form of loans, it needs to check clearly if thecustomers have abilities to pay to the bank or not For loans without collateral, banksusually verify customers based on credit rating of borrowers This loan is also consideredmuch cheaper and less risky for customers Today, banks often require customers to havesalary account paid through their bank, the scale of this loan is more expanded

1.1.3.2 In terms of maturity

Short-term loans

This kind of loan is popular in banking system today Lending period is usually less than

1 year However, this loan often has higher interest rates and high proportion of creditactivities of banks

Medium and long-term loans

This kind of loans usually has higher interest rate compared with short-term loan due tothe loan is bear higher risk Banks usually require customers to have fixed assets or otherassets in proportional value The risk of not being able to repay is high, so credit officersalways monitor the loans, inform to customers about date of payment of principle andinterest

1.1.3.3 In terms of repayment method

Installment loans

These loans allow customers to pay both principal and interest periodically: monthly,quarterly, yearly It is often applied to big loan value, customer’s income is insufficient topay debts once, so this loan is very effective, it helps low income families can improvetheir living The long-term loans are often used this method such as: loan for car, loan forhouse, loan for payment fee

Non-installment loans

These loans require customers to pay principal at maturity date They are usually applied

to small loans, short-term loans and customer’s income after deducting all their expenses

is pay enough to the bank once, so it is often used for immediate needs of customers suchas: home repairs, home appliances, medical care

1.1.3.4 In terms of intended use

Loans for house

These loans are lent for the borrowers who want to buy houses for their living butunaffordable They are very suitable for young couples They are often installment loansand require customers to have collaterals Customers can buy new houses, flats, repairing

or transferring land –use rights Besides, customers can also use a real state that they buy

to use as mortgage and sources of repayment from their salary, business activities andother incomes

Loans for car

These loans meet traveling needs of customers They are one kind of the most attractiveloan kinds of banks When living of standard rises, demand for buying cars alsoincreases, they consider car as main transport to travel Banks often cooperate with cardealers to introduce their product and the period of loans is usually long-term Customerscan use their own car or other collaterals to mortgage If customers use real state tomortgage, they can borrow with more proportion than use that car The loan is ofteninstallment lending

Loans for tuition

The purpose of loans is to provide money to customers to pay education fee In the studytime, customers can choose different ways of paying such as paying by installment bothprinciple and interest for banks or only paying the interest Principle will be paid in thedate of graduation It depends on policies of each bank in specific period These loans arelending suitable to demands of either abroad or domestic studies

Loans for other purposes

The demands of customers are greatly diversified As the economy is improvablydeveloped, demands for purchase will increase People want to take have better

healthcare services, buy appliances, tourisms and so on Today, banks are trying toprovide products and services to meet all demands of customers.

Commercial banks give indirect loans under forms of:

- Discounting commercial bill

- Buying sales installments

- Buying commercial debts

1.2 The benefits of consumer lending

1.2.1 Benefits for banks

Bank

Debt payer

Customers receive loans

Consumer lending brings to banks benefits and advantages, including:

- Consumer lending is a way to enhance profit for banks Similar to other kinds oflending, banks provide fund for customers and get interest or fee for using money fromthis activity However, the difference between consumer lending and others is that itsinterest rate is usually much higher At the same time, the number of individuals andhouseholds outweigh that of enterprises Therefore, consumer market is very large andpotential profits

- Create habits for people to access services, products of the bank As consumer lendingactivities increase, it makes positive impacts on production expansion then push demandfor enterprise lending also goes up Chain reaction occurs as increased production,income and living standard of people increase, demand for consumer lending increase

- Consumer lending as a way of diversifying the investment of the bank, thus, helping thebank increase income and reduce risk The bank can enhance relationship with customers,thereby enhancing ability to mobilize fund

- Consumer lending is also a very effective marketing tool, which enhances thecompetitive ability of banks and increase its business outcomes

1.2.2 Benefits for consumers

Thanks to consumer lending, customers can use service as they desire althoughbefore they are not financially able to perform The growth of the economy has madepeople’s living standards rise Habits accumulated are gradually replaced by a newconsumer behavior of people familiar with the products and services of banks to create acomfortable life even with capital support from banks Especially young people, adultswith low – income, they haven’t enough money to buy houses, cars and other householdgoods, it helps them have a stable life, accordingly give them great motivation to work,save, and take care of children

In addition, consumer lending contributes to exploit all potential customers Itsupports individuals to develop their business, stimulate production and increasespeeding need

1.2.3 Benefits for the whole economy

In parallel with the satisfaction of essential needs, improving quality of life,consumer lending boosts the consumption of goods and production development then

expending, improving efficiency and increasing competitiveness in the supply ofproducts, makes the economy vibrant.

Through consumer lending services, commercial banks contribute to stimulate theeconomy and raise competitiveness of domestic goods, thereby supporting the State toachieve the economic goals as GDP growth, rising per capital income

Besides economic benefits, consumer lending also help the State achieve socialgoals such as poverty alleviation, job providing, reducing social evils

1.2 Consumer lending quality

1.2.1 Points of view on consumer lending quality

General point of view: Consumer lending quality is understood as loans that banks

provide promptly and fully to meet customer’s demand and customers have to repay offboth principal and interest under contract terms

Commercial banks’ point of view: consumer lending quality reflects effectiveness of loans

that are suitable to banks capacity as well as ensure efficient operation and competition

ability of banks

Customers’ point of view: Consumer lending quality reflects that loans are provided to

meet customer’s demand promptly and fully with reasonable interest rate and fee, simpleprocedure; accordingly it helps customers improve their life quality

Point of view from whole economy: Consumer lending quality reflects through

contribution in process of production and circulation of goods, and deals withrelationship between credit growth and economic growth well

1.2.2 Indicators for evaluating consumer lending quality

Today, many banks strengthen development of consumer lending, therefore assessment ofconsumer lending quality is very necessary It reflects the bank’s adaptability to change ofenvironment as well as ability of banks in operation for survival and development, thus,

as evaluating the credit quality, it is necessary to generally consider indicators

1.2.2.1 Quantitative indicators

1.2.2.1.1 Outstanding consumer lending growth

Outstanding consumer lending growth reflects both volume of consumer lending andquality of consumer lending If this outstanding consumer lending growth increasespositively over years, it proves that consumer lending activities in the bank develop well

and stably, and the quality of consumer lending is also improved However, if this figuredecreases to less than zero, it shows that volume of loans reduces; it is affected by somereasons: quality of services, staff’s experience and skill, policies of the bank.

Growth of outstanding consumer lending = (Total of outstanding consumer lending thisyear – Total of outstanding consumer lending in previous year) / Total of outstandingconsumer lending in previous year

1.2.2.1.2 Profit from consumer lending activities

The higher the profits are the better consumer lending activities develop The quality ofconsumer lending are directly proportional to this figure If the figure is higher over time,

it proves that outstanding consumer lending increases; and customers repay principal,interest and other costs in time as per negotiated credit contracts

Besides, other criteria also reflect consumer lending quality as follow:

Rate of contribution = Profit from consumer loans / Total loans

This rate reflects attractive level of consumer loan in comparison with other loans and thehigher this rate is, the more improved consumer lending quality is

1.2.2.1.3 Turnover of credit fund

Turnover of credit fund shows both management ability of credit fund and credit quality

If this indicator is high, then the bank’s lending funds have taken part in a great deal ofprocesses of productions and circulations of goods It also shows that the bank meetcustomer’s demand timely and lending fund management and credit quality are good andvice versa

Return of credit fund = repayment volume/ average total outstanding loans

1.2.2.1.4 Rate of overdue consumer debt

Overdue debt means that time of debt has matured but customers have not repaid andperhaps they are default

Rate of overdue consumer lending debt = Overdue debt of consumer debt/ Totaloutstanding consumer loans

This rate reflects the quality of consumer lending activities If higher this rate is, thebetter quality of consumer lending is and vice versa

Rate of overdue consumer debt shows credit risk

The determination of credit risk is based on three key parameters

- Probability of Default (PD): One credit organization calculates the PD for eachindividual customer of group This method is called direct estimation PD expresses theprobability of the defaulting on his/her payment obligations With respect to othercustomer groups, statistical models have been developed based on conditionalprobabilities estimating PDs that factor in business-specific circumstances such asaccounting figures as well as industry-specific conditions and the macroeconomicclimate External ratings are used to a very limited extent External ratings are translatedinto PDs PDs are updated as the credit organization receives new information aboutgeneral economic conditions or the customer Updates take place at least once a year Theaccuracy of the estimated PDs can be assessed by comparing the estimates at thebeginning of the year with the PDs observed at year-end A customer rating is animportant element of the credit policy and customer assessment Ratings are also applied

to increase the efficient of credit granting procedures and to monitor exposures of lowcredit quality Group credits may, if so recommended, allow that a calculated rating bereplaced by a rating made by a credit especialist

- Loss given default (LGD): The LGD, which is calculated for each customerexposure, reflects the percentage share of the exposure which is expected to be lost if acustomer defaults on a loan The LGDs of the majority of the group’s exposures aredetermined using internal approaches based on loss and default data LGD factors in anysecurity such as mortgages on real property, including the type of security, its quality andranking in the order of priority One credit organization calculates losses as the group’sreceivables Furthermore, costs incidental to dept collection and proceeds fromcollaterals, payments from customers The loss on a defaulting borrower cannot bedetermined until the case has been finally settled LGDs vary with economic trends In afavorable economic climate, default with often not lead to any loss as the value of thesecurity will typically exceed the value of the loan To obtain a meaningful operarison, it

is therefore necessary to recalculate the estimated LGDs at the beginning of the year intopoint-in-time estimates Point in time estimated LGDs, which both reflect the currenteconomic climate Mortgage banking is characterized by low LGDs as the securityprovided by way of mortgages on real property offers good protection against losses Thecredit organization’s use of security is described in more detail in the section about

- Exposure value (EV) and conversion factor (CF): EV is estimated for allexposures of a customer and reflects the total expected exposure to the customer at thetime of default, including the utilization of any commitment granted through conversionfactors (CF) CF is only estimated for products subjects to flexible utilization, forexample, revolving exposures, equity withdrawal, credit lines, loan offers, etc In respect

of non – performing exposures subject to flexible utilization, the credit maximum hasoften been reached or exceeded at the time of default This applies to revolving exposuresand similar credit facilities, for which reason the credit organization applies a conversionfactor above probability of Default

1.2.2.2 Qualitative indicators

Qualitative indicators relate to customer’s satisfaction about products and services ofbanks, so it includes indicators as follows:

1.2.2.2.1 Diversifying products of consumer lending

Diversifying products of consumer lending is to meet customer’s different demands.Moreover, it helps banks maintain traditional customers and attract new customers,decrease risk for banks, increase competitive capacity of the banks from that, it pushesother products development and bring profit for banks

1.2.2.2.2 Average time to approve of consumer lending application

Time is an important factor that customers are interested in In fierce competition, thetime factor can determine success or failure of a project or business plan So, customerswill choose and borrow capital to finance their projects or business plans when banksadapt their demands In reality, many customers pay their attention only to loan timerather than interest rate of loan Short loan time help banks avoid losing good customers

In addition, it improves quality of lending activities in general and quality of consumerlending in particular but still ensure safety of loans Short loan time relates to manyfactors such as: loan procedure, technology, human resource, so the banks need to assessall these factors to reduce loan time to reasonable one

1.2.2.2.3 Bank’s price policy (interest rate and fee)

Interest rate and fee are costs or price of goods and services Customers keep eyes onfactors Each loan has different lending interest and fee, which depend on many factors

especially the level of potential risk (bank’s appraisal) In general, consumer-lendinginterest rate is higher than that of other loans because costs and risk of consumer lendingare high, especially for loans without collateral such as overdraft, installment loans Inaddition, interest rate also depends on other factors:

+ Mobilizing interest rates: Normally, if bank’s mobilizing rate is low, loan rate is alsolow and vice versa

+ Customer ranking: banks usually appraise customers via customer ranking system Ifcustomers have high mark, customers are assessed as good, low level of risk, therefore,low interest rates are also in proportion Result of customer ranking relies on differentfactors such as characteristics, capital, capacity, collateral, condition of customers

1.2.2.2.4 Customer care policy

This criterion reflects quality of banking services that banks bring to customers If thebanks provide good products and services, customers’ satisfaction will be high and viceversa It also shows bank’s attention to customers The poor customer care policies willreduce customers’ attraction, and then it makes market expansion become limited for thebank In high competition market these days, many banks give customer care very goodpolicies to attract customers to turn to their bank, so Techcombank needs to havesolutions to improve its customer care policies

1.2.3 Factors affect consumer-lending quality

1.2.3.1 Factors inside banks

Financial capacity: Capital is the most important factor in business activities of any

bank Large capital will help banks expand business activities; develop more services aswell as banking products, distribution network Further, large capital also aids consumerlending banking to focus on quality of services as well as to implement moderntechnology into business activities On the contrary, small capital affects so much onbusiness activities of consumer lending It leads to many difficulties in developingservices as well as bank’s competition ability with other banks

Policies and orientation of the bank: Factors contributing to the success of banks are

the policies and orientation of the bank Consumer lending activity of banks will besuccessful if the bank could build reasonable policies Theses policies must be inconsistent with banking capacity and business orientation Almost banks develop both

corporate and retail banking services When a bank concentrates on development of retailbanking orientation, it also focuses on consumer lending activities and then buildsstructure and allocates human resource, funds to be suitable

Customers are interested in number of issues before they deal with a bank such ascustomer-care policy before and after the loan; policies on fee; high or low interest rate;suitability to current income of customer, and all of these issues in comparison with otherbanks

Lending procedure: Customers also keep eyes on loan application procedures whether

they are complicated or not, loan appraisal time, if the evaluation period is too long, thecustomers will not want to wait and look to other banks A system of procedures is builtreasonably, scientifically and done strictly shall be a determining factor to qualityassessment and thus decision quality loans

Human resource: This core factor contributes greatly to the success of consumer

lending Human resource refers to both quality and quantity of this resource High qualityhuman resource will access high technology as well as modern management Creditofficers need to have good experience in customer assessment, so that they can makeright decisions Beside knowledge about the products, some characteristics the bankofficers should have knowledge of law and professional ethics because of not havingthese, they are easy lead to do violent rules of the bank for personal interests

Quality of credit information: Information is an important factor for any bank in the

market economy In consume lending activities, information is necessary to appraise andmake decision whether to lend or not, control loans safety and effectively There isusually a credit information center (CIC), which supports enterprises’ information forbanks Information can be collected from many sources, such as CIC, customers,competitors and during credit appraisal In order to prevent risks for banks, informationcan be collected exactly, timely and comprehensively

Internal control: Any operation which is brought into reality, need to be tested or

controlled strictly in order to that operation goes on the right way, hits the last finishingpoint which must be achieve In the credit operation of commercial bank, credit-controlling officers will help banks check conditions of loans to find out mistakes fromthat point the banks give out solutions and adjustments quickly and timely to avoid risks

for banks.

Technology: It has the important impact on customers If the bank has modern

technology will lead to procedure of loan is quick, accurate and alleviate the cumbersomeprocedures for customers; and client management profiles are also more convenient.Besides, technology helps banks save costs, time and enlarge potential customers.Therefore, modernizing and investing banking technology is a strategy and vital key toexist in competitive environment

Network: For retail banks, distribution is considered as strength to occupy and remain

market share Distribution channel is also importance for customers and banks inaccessing to loans Customers meet bank officers at the branch, asking for a loan Branchmanages customers regionally which is called tangible channel Through this channel, thebank contact to customer directly, information from the bank is transferred to customeradequately and accurately Also, this visible channel helps bank officer evaluate customerfaster, reducing the time of approval process However, intangible channel for internet,mouth advertising is becoming popular in this modern society This is the fastest way toaccess information from the bank Customer would no longer contact to bank officer,they still be advised through online application or 24/24 call center However, providing aloan is a process requiring careful and adequate evaluation That is why banks are nowlaunching more and more branches together with modernizing technology to broadeninvisible channel, creating more chance for customer and the bank also

1.2.3.2 Factors outside banks

1.2.3.2.1 Factors involving customers

Quality of lending activities depends greatly on borrowers because loans are good onlywhen customers repay fully both interest and principal on schedule of credit contract.Hence, when assessing repayment ability of customers, care should be exercised towardthese factors:

Characteristics of customers: It relates to ethical borrowers Ethical borrower is

assessed based on competency and credibility This is critical for banks to consider loans,

if borrowers even have high income, stability to repay They are not willing to pay thedebt Ethical borrowers in credit relation are evaluated based such honest, the willingness

of customers to repay, cooperation attitude in implementing all of the covenants in the

contract credit.

Financial capability: Financial capability of customers is a factor affecting the ability to

pay the debt Most of the consumer lending loans are defined income sources for paying

is regular income in the future If customers have high and stable income, the debt isusually less affected to other spending, especially essential spending, so the loan becomesmore secure

Collateral: Collateral is the legal basis for additional sources of repayment to the bank It

increase safety for the bank, Although the bank hold collateral, if customers do not paythe debt for the bank, the bank will takes time and cost to compulsory sale, so propertyguarantee is one of the criteria for loan approval but is not the most important criteriaplay a role in the lending decisions of commercial banks

Business operation situation: bringing borrowing capital into business effectively that

will help borrowers get expecting return so they can bank interest and principal, viceversa, if their business is not good, they will not able to settle their loan

1.2.3.2.2 Macro factors

Economic environment: The economy is a system that includes many activities relating

to one another Therefore, any fluctuation of economy also causes changes in other areas.Stable or abnormal, fast or slow growth of economy will affect strong bankingoperations, especially credit activities

Consumer loans are very highly sensitive to the changes of economic environment Asthe economy flourishes, high growth and stability, consumer demand will rise, it leads toconsumer lending activities of commercial banks develop Conversely, when theeconomy goes down, consumer demand also decreases and lending activities will facerisks

Social environment: Social environment factors include: social situation, habits,

psychology, education, ethic… (Through typical characteristic as beliefs, hardworking,honest, saving and other factors in place, work also affect spending habits of people.Generally, where high density population, high education, consumer demand will behigher than others in which most of manual labor wish only to ensure normal life, theydon’t think about borrowing to buy goods and raise living standards

Legal environment: Legal environment includes legal system of State as a factor to have

a strong influence on consumer lending activities of commercial banks All economicsectors have the right to free business but must be within the framework of law.Consumer lending activities of commercial banks must also comply with the provisions

of the State, law on credit institutions, civil law and other regulations If legal documentsare not clearly, fully, it’s easy to create the gap law that make difficult and harm to theinterests of parties participating in these field Conversely, the law is regulated strictlyand comprehensive, it makes consumer lending activities as well as economic – socialactivities done efficiently

CHAPTER 2 ASSESSMENT OF CURRENT CONSUMER LENDING SERVICE QUALTIY AT TECHCOMBANK

2.1 OVERVIEW OF TECHCOMBANK

2.1.1 Establishment and development

Vietnam technological and commercial joint stock bank – Techcombank was established

on July 27th , 1993 aiming to become an efficient financial intermediary bridgingbetween the savers and the investors for capital demand for business and economicdevelopment in the open door era Its head quarter is at 70-72 Ba Trieu street, Ha noi.After operating16 years, Techcombank has been one of the most active banks in term oftransaction with large companies and financial institutions Its charter capital constantlyrises The initial capital was VND 20 billions only, now Techcombank has registeredcapital of VND 5.400 billion, total asset of VND 92.581 billion The system of branchesand transaction points has been continually expanding By the early of 2010, the total ofbranches and transaction points up to 52 branches and 160 transactions points in 40 citiesand provinces throughout Vietnam

Table 2.1: Some main figures at Techcombank

Loan outstanding 19.958 26.342 42.113

Earning before Tax 709.740 1.615.855 2.252.897

Source: Annual reports at Techcombank.

International partnership

Together with the successful of Techcombank, there are important contributions ofleading domestic and international partnership

Hong Kong Shanghai Banking Corporation-HSBC

HSBC has become TCB’s strategic partner since 2006, with 10% its stake Up to 2008,HSBC’share was up to 20%, the maximum ownership of foreign bank is allowed to havefor a local bank As strategic partner of Techcombank, HSBC can support Techombank

for management capabilities and technological know-how.

TCB’s management team has been strengthened with helps from several key executivesfrom HSBC The positions help by such personnel, Head of personal Finance Service(PFS) division, Chief Risk Officer, CFP division, Chief Risk officer, CFO, Head ofCollections, and IT security consultant This is a strategic strength for TCB as otherJSCBs with strategic alliances with international institutions have not received the samedegree of hands-on operational support from its partners Further, TCB has been able toleverage on HSBC’s ATM network to expand its customer reach and jointly promote awide range of banking products including retail lending and deposit products, tradefinance, treasury products, derivatives and remittance services

Vietnam airlines corporations

TCB has been able to tie up with the national carrier, which is also a shareholder of thebank to develop a co-branded credit card that offers the cardholder numerous privilegesfrom both Vietnam Airlines and TCB It has been to further leverage on this relationship

by arranging aircraft leasing for six new aircraft in collaboration with HSBC and CreditSwiss TCB currently handles the cash management and payroll functions for several ofits subsidiaries TCB expects to strengthen this relationship in the future through offeringmore products and services to the national carrier

2.1.2 Organizational structure

The existing banking management system will be continued to improve viaestablishing the professional departments responsible for building strategic development,risk management…such as: strategic investment council, executive committee of EXCO,assets management committee, human resource and compensation committee, audit andrisk committee, internal audit and so on in order to enhance management quality, controlquality and executing quality

In addition to banking business activities, TECHCOMBANK system hasestablished a membership bank and three subsidiaries those are: Techcombank securitiescompany LLC, Techcombank assets management company, one-member company forliabilities and assets management

Chart 2.1: Organizational Structure at Techcombank

2.1.3 Network

Techcombank has nationwide network Its headquartered is located in Batrieu street,Hanoi and many branches and transaction offices throughout Vietnam Branches areclassified base on their asset’s scales Grade A branch is the one has total asset over 900billion VND, grade B one has total asset VND 500 billion, grade C over VND 200 billion

and less than VND 500 billion is grade D Besides, there are transaction offices belong tothose branches

Table 2.2: Techcombank Network nationwide

Total Branches & transaction offices 130 151 188

Sources: Annual report of Techcombank.

To the end of year 2007, Techcombank has 130 branches and transactions offices in 16provinces and cities throughout Vietnam after 13 years of operation, aiming to reachtarget of over branches countrywide by 2011 In 2008, it increased by 21 branches andtransactions In the late 2009, Total branches and transactions of Techcombank reached

188 In the North and Danang city, Techcombank has pretty wide network and be the top

3 bank of total asset and credit market share However, in the south due to lack ofhumane resource n quality and quantity, the development network is not good, Anyways,Techcombank is one of three banks has the largest network in Vietnam

2.1.4 Total assets

Techcombank is one of the commercial banks having the largest scale and highest growthnow in Vietnam By late 2009, total assets of Techcombank was estimated at VND 92.581billion, more than 1.6 times compared to 2008 and 2.3 times compared to 2007 (VND39.542 billion) The bank is also one of three commercial banks having the largest totalassets as well as strongest growth in banking system in Vietnam This shows that thescale of operation is increasingly expanding

Source: Annual reports at Techcombank

Chart 2.2: Total assets at Techcombank 2.1.5 Technology.

To become a leading bank in commercial joint stock bank group, Techcombank plans amodernized technology project in order to meet changing demands in banking industry

In addition, banking industry in Vietnam has been more competitive especially afterVietnam becomes an official member of World trade organization This competitivepressure demands banking technology must be modernized to meet altering demands ofcustomers

In 2001, Techcombank signed a contract with software supplier Temonos T24, Temenosgroup is the world’s group for banking solutions known for its T24 or famous globussolution More than 500 banks around the world have deployed Temenous solutions,including Vietnam’s leading banks T24 solution is a large-scale project deployed fivemodels comprising credit, retail banking and treasury The modern, flexible andintegrated T24 system will help be able to satisfy the bank’s requirements, online demandand immediate processing, complying closely to practices and operation

Leveraging on the globus system and the Bank’s alliance with Vietcombank,Techcombank commences issuing F@stAccess card on 05 December 2003 The bankinaugurates the completion of deployment of the globus system on the whole network on

16 December 2003 The bank started the process of developing a new corporate identity

In May 2008, Techcombank launched cash deposit machine (ADM) implementing many

projects on technological modernization: upgrading the core banking system to samplet24.R7 and becoming member of two cooperated card organization smart link and banknet, connecting AMT system with strategic partner HSBC, opening free call centre (24/7)1800588822.

Besides, Techcombank provides many utilities for customers, for example: balanceaccount checking, exchange rate checking via its website Website is also an image-marketing tool and services for the bank to customers

2.1.6 Human resource

Human resource is the firm foundation for every enterprise to develop rapidly and in asustainable manner For Techcombank, every staff is seen not only as an asset but also asthe most who implement business strategies and maintain the relationship withcustomers, ensuring the Bank’s success in recent years as well as in the future

The bank, during 17 years of operation, has always attached great importance todeveloping high-quality human resources, and creating a professional workingenvironment with equitable policies to encourage the customers and the Bank.Techcombank has also paid special attention to offering preferential treatment, both inthe material and spiritual forms, to staff was able to attract and retain quality staff in ahighly though Techcombank remuneration levels were not the highest among banks, ourstaff have still worked wholeheartedly for the development of the Bank

In addition to trademarks of banking services and products, Techcombank has created atrademark of human resources, the trademark of a working environment where staff hasstrong attachment to and receive encouragement and support to enrich their knowledge,enhance capability, and contribute to the success of the Bank

Recruiting and treating talents.

In 2009, when many domestic and foreign banks had to trim their workforce due to theimpact of the economic recession, Techcombank emerged as a bright point for creatingjobs and attracting talent As of late 2009, the staff number increased 49% against theprevious year (from 4,224 to 6,293) in which the number of managerial posts rose36.86% and staff having at least two years of experience rose 58.45% The percentage ofstaff having graduate and post graduate degrees increased from 78% to 82% and almostemployees of Techcombank are very young, managers are often under 35 years

Table 2.3: Human resource level

University graduates and postgraduates 82%

College and short-term training graduates 15%

Source: Annual report at Techcombank

Taking the developing Vietnamese banking industry into consideration, Techcombankpays special attention to recruiting talented people who are well-trained and hold middle

or high-ranking managerial posts in international institutions, as well as assigning theright work and positions to the right people Therefore, most of the staff are reallyenergetic and enterprising Staff often put forth effective customer development andbusiness solutions

Treasuring talents

Talents are considered to be a treasure of the nation in general and of the bankingindustry in particular Thus, Techcombank attaches great importance to offeringpreferential treatment to staff with the viewpoint of minimizing personal worries so thatthey can concentrate on improving the quality and efficiency in their work

In 2008, Techcombank implemented the share bonus program for employees who havecontributed to the Bank’s development to encourage their loyalty

Not only paid attention to financial factors, but also to the healthcare of our staff and theirfamily members, so that they keep their mind on their work In addition to ordinaryhealth insurance, the Banks has offered accident and Techcombank care health insuranceprovided Bao Minh Insurance Techcombank is the first bank to offer this policy to allemployees and their family members, easing their worries about accidents or illnessesand setting their mind at rest when using best healthcare services

Training

Along with recruiting experienced, well trained, proactive and creative employees,Techcombank focuses on training promising employees for a secure future The bank hasset a prime target of fostering human resource in sustainable manner, turning out highlyskilled and professional staff to offer better services to customers

Techcombank has actively organized in-house training courses designed for newemployees to enrich their knowledge and skills to better understanding market demandsand development trends to launch new products and services Techcombank has also

coordinated closely with third-party organizations to provide training for employees, andsend them to good international and domestic courses in different areas such as Qualitymanagement and strategy management Notable, in early 2009, Techcombank signedtraining contracts with famous universities in Hanoi and Ho Chi Minh city and requestsome training centers to develop appropriate training programs, most of which aredesignated for candidate for managerial positions in the near future.

The total number of training course increased 49% (from 291 to 426) in late 2009, andthat of staff undergoing the courses surged 58% (from 7.351 to 11.631) Training coursecosts rose 59% to VND 7.74 billion

2.1.7 Business performance of Techcombank over period of 2007-2009.

After blooming economic period with a series of big investment projects, securities firms,financial investment companies, in 2008, the economy of Vietnam was hit by the worldfinancial crisis and economic volatilities that led to worse conditions such as inflation,trade deficit, crashed stock and real state market In order to limit the adverse impactsfrom economic crisis, the Government and State bank have gradually imposed macropolicies, which focused on tightening currency policy Meanwhile, financial crisis spreadglobally made several giant financial co-operations collapsed

In such situation, like other commercial banks, Techcombank faced many difficulties inbusiness operations However, with large financial potentials, Techcombank hasgradually overcome challenges to achieve its target setup and asserted as strong andstable bank as well as it is one of important link in system bank

At the end of fiscal year 2008, total raised fund reached VND 41.365 billion, increasing

by 64.54% compared to the end of 2007, accounted for 68.68% of total assets of thebank Thanks to strong finance, Techcombank became one of few banks maintaining itsliquidity well in difficult situation of the economy Hence, as of September 2009, totalraised fund reached VND 65,000 billion

Lending activities

At the end of 2009, total loans reached VND 42,092,767 billion, increasing by 62%

comparable with late 2008 and 110% with 2007 The bank always controls overdue loansunder 2% In order to become the best retail bank in Vietnam, Techcombank acceleratesretail market In 2007, total retail market loans were VND 7,480 billion; and in 2008 due

to numerous difficulties in the market, it reduced the growth of total outstanding loans forindividual customers At the beginning of 2009, the economy recovered, the demand forconsumer increase sharply, Techcombank diversify its products including: Cards, homeloans, over drafts, overseas study loans at the end of 2009, total retail market reachedVND 14.102 billion

Techcombank also pays special attention to traditional products and services that aim atenterprises Having understanding of the specific operations and demands of certaingroup of businesses, the bank offers specialized products and services for differentmarket segments, such as large corporations, medium-sized enterprises (MMEs), smalland medium-sized enterprises (SMEs), micro, small and medium enterprises (MSMEs)and business households In 2008, Techcombank continued to make radical changes inthe organizational structures at the head office, branches, and sale outlets (TSOs) in order

to serve business customers in a more professional maner Techcombank conductedmarket research for each segment so as to develop and offer competitive and flexiblefinancial solutions and products as appropriate Commercial banking services for SMEscontinued to be the bank’s core business In 2008, Techcombank implemented a businessstrategy targeting SMEs in line with the consultancy of the Interanational FinancialCorporation (IFC), a member of the World Bank Group This strategy is in consistencewith the bank’s vision and corporate customers’s demand: to become a leading bank interms of diversification, reliability, quality, and efficiency

Realising the bank’s efficient operations and reputation, many large multilateral financialinstitutions such as World Bank, the Asian Development Bank (ADB), and the Swissstate Secretarial for Economic Affairs bank (SECO) have selected Techcombank as adisbursement bank for their projects that help SMEs again access to soft loans to renewtechnology and buy environmentally friendly and energy-saving equipment

By the end of 2009, Techcombank corporate outstanding loan had more than VND28.010 billion, increasing by 74% compared to late 2008 and up 129% against late 2007

Table 2.4: Structure of corporate customers.

Big corporate MME SME MSME

For large corporate customers, the Bank prioritizes the availability of funds for separateprojects

For MSMEs and household business in 2009, Techcombank took the lead in providingthis important sector with standardized financial packages such as: “Micro-bankingfinancing” and “supplier financing” These packages have clear term sheets, quicklending procedures, and flexible collateral, suitable to trading households and MSMEsoperating in various fields

Table 2.6: Loan industry

Agriculture

and

forestry Construction

Hotelindustry

TradingManufacturing

& processing

Logistics,transportation

financing with preferential interest rates and export bill collection to create moreconvenience and added value services to customers and to improve the Bank’s operationefficiency.

With a wide network of correspondent banks in nearly 100 countries in the world, TheBank continued to confirm our position as the best bank in terms of internationalpayments and trade finance among joint stock banks in Vietnam The total internationalpayment volume increase 45% in 2009 to USD 4.886 billion Techcombank was also thefirst bank in Vietnam for which the IFC raised its guarantee limit up to USD 50 million inthe framework for the Global trade finance program(GTAFP) for issuing banks

Table 2.7: International payment and trade finance

Techcombank’s guarantees are accepted by many foreign and domestic banks andenterprises because of the Bank’s strong financials and well establishes reputation in themarket Currently, Techcombank provides the following types of guarantees:

- Bid bond guarantees