LV Thạc sỹ_Solution to improve lending services for SMEs at Military bank

MB Military BankNPL Non-performance loans SBV State Bank of Vietnam SMEs Small and medium enterprises... Research scope and limitation Research scope: The scope here has focused only on

and guidance.

Also I would like to thank the staffs at Military Bank, … transaction office inassisting me broadening my view and knowledge of banking and finance.Especially, my deepest appreciation to Mr …, the office director, and Ms …,the business customer relationship manager at Military Bank, … transactionoffice in helping me collecting necessary information for my thesis

Lastly, I offer my heartiest gratitude to my parents and all of those whosupported me in any respect during the completion of this thesis

…

MB Military Bank

NPL Non-performance loans

SBV State Bank of Vietnam

SMEs Small and medium enterprises

dynamism, innovation and flexibility in advanced industrialized countries, as well

as in emerging and developing economies They are responsible for most net jobcreation in many countries and make important contribution to innovation,productivity and economic growth If the SME sector does not have access toexternal funds for investment, the capacity to raise investment per worker, andthereby improve productivity and wages, is seriously impaired

The development of banking services and SMEs are now considered to be leadingobjectives of MB In recent years, banking operations for SMEs has significantlyexpanded the scale, quality, product improvement but still some drawbacks Startingfrom this reality, the project “Solution to improve the lending services for small andmedium enterprises at Military Bank” was selected

The thesis researches on the features and current situation of lending services forSMEs at MB to offer solution to enhance the quality of the services In order tohave real and comprehensive solutions, the author has researched all the issues inthe whole banking system After having a broad view of the problem, the author hasconcentrated on the Military Bank in particular and find out some limitations aboutlending policy, human resources, and marketing…

Along with studying the reasons of the limitation, the author brings out somerecommendation to enhance the lending services for SMEs at MB They include:improving capital mobilization, reducing information asymmetry of SMEs and

improving risk management, improving products and services, human resources management, and marketing management In addition, the author has made some

comments for SMEs and the legislation, administration tools of central bank

Small & medium enterprises play an important role in the economies of mostcountries in the Asia-Pacific region not only because of their sheer number but alsothe variety of their activities In part, SMEs contribute to countryside development,

as well as support large industries and serve as a breeding ground for innovationand adaptation SMEs thus can be looked upon as a source of constant renewal incommerce and industry and as a wellspring of competition and dynamism

In Asia, SMEs have made significant contributions over the years: number ofenterprises accounts for 80-90%, employment provide over 60% of the privatesector jobs, production and value added generate 50-80% of total employment, GDPcontribute about 50% of sales or value added, enterprises set up by womenentrepreneurs share about 30% of direct total exports, and regional dispersal ofindustry, among them

Vietnam has the growth rate more than 7% per year This growth has trend to bemaintained, especially in industry and service sector In which, SMEs sectoraccounts for 95%, therefore they contribute remarkable to total output and createjob and reduce poverty…

However, SMEs have to face with many difficulties and challenges to look for abetter development due to lack of fund How does MB to promote advantage,achieve more market share in competition with other banks? This is a big question

of MB

Because of above reasons, the author would like to present the thesis with topic

“Solution to improve lending services for SMEs at Military Bank”

2 Research questions and objectives

Research question: In Vietnam, the SME market is the target market for almost

joint stock commercial bank Competition is heavy and is likely to increase So how

commercial banks can compete with each other, how they can serve their customersbetter and better is really a hard question.

4 Research scope and limitation

Research scope: The scope here has focused only on lending activities for SMEs at

Chapter 1: Lending services for SMEs in commercial banks

Chapter 2: Current situation of lending services for SMEs at MB

Chapter 3: Solutions and recommendations to improve the lending services forSMEs at MB

CHAPTER 1: BANKING SERVICES FOR SMES

IN COMMERCIAL BANK

1.1 Banking services in commercial banks

1.1.1 Definition of commercial bank

Until now, there are many concepts of commercial bank In US, A commercial bank

is defined as a type of financial intermediary and a type of bank Commercialbanking is also known as business banking It is a bank that provides checkingaccounts, savings accounts, and money market accounts and that accepts timedeposits After the implementation of the Glass-Steagall Act, the U.S Congressrequired that banks engage only in banking activities, whereas investment bankswere limited to capital market activities As the two no longer have to be underseparate ownership under U.S law, some use the term "commercial bank" to refer to

a bank or a division of a bank primarily dealing with deposits and loans fromcorporations or large businesses In some other jurisdictions, the strict separation ofinvestment and commercial banking never applied Commercial banking may also

be seen as distinct from retail banking, which involves the provision of financialservices direct to consumers Many banks offer both commercial and retail bankingservices

In Vietnam, according to banking legislation on 23/05/1990 of Vietnam State bankcouncil, commercial bank is defined as money-dealing organization whose mainand routine operation is receiving deposit from customer either responsibility ofrepaying and using it to perform lending activities or carrying out discount, making

as a payment mean

During these recent years, the banking system has contributed actively to thedevelopment of the economy such as: improving macro-economic, controllinginflation stabilizing currency values, promoting business development, andcontributing to national economic growth

1.1.2 Role of commercial banks

The credit intermediation role

Transforming savings received primarily from households into credit (loans) forbusiness firms and others in order to make investments in new building, equipment,and other goods is considered the most important function of commercial banks Inperforming this role, commercial banks act as both borrowers and lenders banks or

a bridge between surplus capital and those in need of capital That is to say, theysource funds or deposits from members of the public and then they onlend thosefunds or make those available to various individuals and organization for financingproductive activities, as well as for financing consumption Profit is the differencebetween interests received from loans and interests paid for depositors

The payment intermediation role

Carrying out payments for goods and services on behalf of customers (such as byissuing and clearing checks and providing a conduit for electronic payments) ispayment intermediation role Depending on needs, customers can choose their ownmethods of payment such as checks, debit cards, credit cards This kind ofpayment is very convenient for customers because it saves time, money and ensuresprivacy and security Therefore, commercial banks have promoted the circulation ofgoods, payment speed, speed flow of capital, thereby contributing to economicdevelopment

Money creation role

Creating money is a key function which reflects the nature of commercial banks.The very first and primary target for the existence and development of any financialinstitution is seeking for profit Due to this peculiar nature, banks also contribute tocreating money for the whole economy Money creation role is executed based thebasis of two other functions as mentioned above When a commercial bank loan isextended, new commercial bank money is created As a loan is paid back, thecommercial bank money disappears from existence Since loans are continuallybeing issued in a normally functioning economy, the amount of broad money in the

economy remains relatively stable Because of this money creation process by thecommercial banks, the money supply of a country is usually a multiple larger thanthe money issued by the central bank; that multiple is primarily determined by thereserve ratio set by the relevant banking regulators in the jurisdiction With thisfunction, the system of commercial banks increases means of payment to meeteconomic needs of payment society.

1.1.3 Lending services in commercial bank

Based on the borrowing requirements of businesses, bank credit can be classified onthe following grounds:

• Based on the loan purpose:

o Real estate loans: A loan related to the procurement and construction of realestate such as housing, land and property in the industrial and commercial sectors…

o Industrial and commercial loans: A short-term loan to cover replenishing theworking capital, paying taxes, and meeting payrolls of enterprises in the industrial,trade and service sectors

o Agricultural loans: A loan to cover the cost of production such as fertilizers,pesticides…

• Based on the loan term:

o Short-term loans: A loan with the term of less than 12 months to cover atemporary shortage of working capital of businesses

o Medium and long term loans: A loan with the term of one to five years to invest

in purchasing fixed assets, building factories and expanding production

• Based on credibility with banks:

o Secured loans: A loan based on the guarantee such as collateral, pledge,guarantee

o Unsecured loans: A loan without collateral, pledge or third party’sguarantee, solely based on the bank's credibility with clients

• Based on the method of repayment:

o Term loans: Repayment periods are specified under the contract Term loansincludes loans with one repayment period, loans with many repayment periods,loans with many repayment but no specific term

o Loans without specific time limits: loans in which the borrowers can repay atany time, but notice before a period of time.

• Based on value of credit:

o Cash loans: A loan in which the value of credit is provided in cash

o Property loans: This form is often reflected in leasing operations

1.2 Overview of SMEs

1.2.1 Definition of SMEs

There are many different notions of small and medium enterprises; however, mostdefinitions are using the number of permanent employees as a priority criterion,besides scale of capital or revenue For most of the developed countries (USA,France, and Japan), the enterprises with less than 500 employees are considered assmall and medium scale

All definitions are relative nature, because whether a business is small or notdepends on field of activities Therefore, we can understand small business is anindependent business in its own field but does not dominate in its business

According to Government Decree 90/2001/ND-CP, dated 23 November 2001,SMEs in Viet Nam are defined as the following:

SMEs are independent production and business establishments, which makebusiness registration according to the current law provisions, each with registeredcapital not exceeding VND 10 billion or annual labor not exceeding 300 people

On the basis of the concrete socio-economic situation of each branch or locality, inthe course of implementing the support measures and programs, both or either ofthe above-mentioned criteria on capital and labor may be applied in a flexiblemanner

The statistics in this section provide a broad picture of SMEs in Vietnam, based onthe latest Establishments Census conducted by the General Statistics Office in 2002.For the purposes of this analysis, SMEs have been divided into 3 sub-groups:

1 Micro enterprises: Engaging up to 9 employees

2 Small enterprises: Engaging up to 49 employees

3 Medium size enterprises: Engaging up to 299 employees

Establishments Micro Small Medium Sub-Total

Number of business establishments (1,000) 2,660 46.7 11 2,718 2.5 2,720

Percentage of all establishments (%) 97.8 1.7 0.4 99.9 0.09 100 Employment

Persons engaged per establishment 1.6 19 112 2.4 773 3

Source: GSO Establishments Census, 2002, classified as per tentative size groupings.

Table 1.1: Establishments and Employment in Vietnam (2002)

SMEs which have jobs for more than 12 million workers are an important enginefor economic development, poverty reduction Although in the next phase ofintegration of small-scale enterprises will face many difficulties, but in a developingeconomy like Vietnam, the development of this force is very important Andaccording to the guidelines of the Government, to 2010, the country will have about500,000 SMEs

1.2.2 Role of SMEs

In each national economy or territory, SMEs can keep the roles for differentlevels, but generally there are some similarities such as the following:

SME are Engine of Growth

SME sector is the largest provider of employment in most countries Manyresearchers conclude that SMEs, being less mobile than large corporations, are morelikely to have ties of dependence and familiarity to their communities, which willensure they protect their reputation and relationships among neighbors andcustomers The presence of SMEs also correlates with several economic factors,including the growth of a nation's gross domestic product (GDP)

According to the General Statistics Office of Vietnam, of about 500,000businesses, SMEs account for nearly 97% with number of employees, budgetrevenue, and GDP accounting for over 50%, 17.64%, and 30% total marketrespectively Their number is huge, and especially they are scattered widelythroughout the rural areas and therefore have a special “local” significance for therural economy

SMEs are a major source of technological innovation and new products Theyuse technologies that are in a general sense more “appropriate” as compared tomodern technologies used by large enterprises (Les) to factor proportions and localconditions in developing countries, i.e many raw materials are locally available butcapital, including human capital, is very limited They are also an important part ofthe supply chain for large MNCs (Luetkenhorst, 2004)

SMEs are essential for a competitive and efficient market

SMEs with high turnover and adaptability play a major role in removingregional and sector imbalances in the economy They are more likely to quicklychange or adjust business without large fluctuations to meet the market demand.They also have the ability to recover rapidly after the economic crisis The number

of enterprises of this increase will contribute to facilitate technological innovation,promoting ideas and new skills, promote investment between the economies in theregion and beyond

• Easy entry and exit of SMEs make economies more flexible and morecompetitive

• Large number of SMEs creates competitive market pressure

• Also play an essential role as subcontractors in the downsizing, privatizationand restructuring of large companies

SMEs are Important for Poverty Reduction

SMEs have their significant effect on the income distribution, tax revenue, andemployment, efficient utilization of resources and stability of family income.According to the United Nations Industrial Development Organization UNIDO,for developing countries, integration into the global economy througheconomic liberalization, deregulation and democratization is seen as theparamount way to triumph over poverty and inequality SMEs have a propensity

to employ more labor-intensive production processes than large enterprises Itmeans that SMEs provide more opportunities for workers, especially low- skilledworkers This has great significance for Vietnam, a country with a population of 80million and the workforce increasing each year

SMEs are sometimes the only source of employment in poor regions and ruralareas The agricultural sector has shown not to be able to absorb the increasingpopulation in the rural areas As a result, rural migration increased dramatically,causing high unemployment rates and its related socio-economic problems in theurban areas Therefore, non-farm activities in rural areas, especially rural industriesbeing a potentially quite dynamic part of the rural economy have often been looked

at their potential to create rural employment, and in this respect, SMEs can play animportant role

SMEs Play a Particularly Important Role in Developing Countries

SMEs play a particularly important role in developing countries where poverty

is most severe SMEs are the starting point of development in the economiestowards industrialization

•Contribute to economic growth

•Are necessary for agriculture-dependent nations transitioning to anindustrial- and service-oriented economy

•Are correlated with lower income distribution inequality

•Are excellent "beta-sites" for innovation and sustainable initiatives due totheir inherent flexibility and risk-taking ability (Raynard and Forstater, 2002) examples include Verdant Power or Energia Global

•Provide all of these crucial benefits in developing countries despite theirrelatively smaller presence (Patricoff and Sunderland, 2005)

•Another aspect of this business is mainly serving for the domestic market,activity-based resources, develop technologies and skills in the water, this maymean leverage helped improve the quality of the life, reduce the negative burdenfrom society

1.2.3 Features oF SMEs

Advantages

• Ease of starting: Business Law now applies to all lines of business regardless

of their capital or the legal provisions required when starting a business The lawalso does not stipulate the minimum number of employees for the establishment ofenterprises to be approved Along with the improving business environment, thenumber of small and medium enterprises registered rapidly increases To a certainextent, since the enforcement of regulations on bankruptcy and dissolution ofenterprises is not favorable, some SMEs then choose a simple deactivation planinstead of retreating from the market formally Also, it is by no means an easy task

to offer precise statistics concerning the number of SMEs operating in difficultmarkets

• With little initial investment, the business cycles are often short lead tofaster recovery of capital The shorter the business cycles are, the more efficientlyenterprises have done SME survival and development in most areas, the economicsectors: SMEs operating in all sectors of the economy: trade, services, industry,construction, agriculture, forestry, fishing Industry and activities in all forms such

as state enterprises, private enterprises, joint stock companies, limited liabilitycompanies, enterprises with foreign investment and the basis of individualeconomic

• With high flexibility to changes of the market, SMEs are able to shift to otherbusiness or goods and services quickly On the other hand, SMEs exist in alleconomic sectors such as trade, services, industry, construction, agriculture, forestryand fishery and activities in all forms such as state enterprises, privateenterprises, joint stock companies, limited liability companies, foreign investmententerprises So that products of SMEs are diversified and adapted to the needs ofthe market

Disadvantages

• Operating capacity is limited Competency and skills of managers andworkers still weak Because scale of capital is small, SMEs do not have too manyconditions for investment in upgrading and renovation of advanced and modernmachinery and equipment The use of obsolete technologies leads to lower productquality, and poorer market competitiveness SMEs also face difficulties in finding,penetrating into the market, and distributing due to lack of information on marketsand less effectiveness on marketing

• Management capacity is low: Since this is a kind of young economic level,the skills of business leaders and workers are limited Number of SMEs withexperienced business owners, director, a high level of expertise and managementcapacity is not large A lot of business owners and managers of private enterprises

have not been trained professionally in business and management They are short ofknowledge on socio-economic and business management skills On the other hand,SMEs cannot pay high wages or other attractively remunerative policies to attractand retain executive's management as well as good workers.

1.3 Lending service for SME in commercial bank

1.3.1 Credit risk

Traditional commercial banks and investors have been reluctant to service SMEs for

a number of well-known reasons which include the following:

• SMEs are regarded by creditors and investors as high-risk borrowers due toinsufficient assets and low capitalization, vulnerability to market fluctuations andhigh mortality rates;

• Information asymmetry arising from SMEs’ lack of accounting records,inadequate financial statements or business plans makes it difficult for creditors andinvestors to assess the creditworthiness of potential SME proposals;

• High administrative/transaction costs of lending or investing smallamounts do not make

1.3.3 Current situation of banking services for SMEs in commercial banks

According to the report of the Economic Committee on economic development,market credit in the first 9 months is a critical evaluation Accordingly, in the fourmonths of 2010, credits increased by only 5.58% compared to 12/2009, and average1.4% per month; in the next 5 months, credit rose by 13.92% with average growth

of 2.78% per month Leading figure of 4.5% growth in credit in September isconsidered the highest number since early 2010 and bring credit growth in the ninemonths up 19.5% Thus, compared to the target overall credit growth of 25% in

2010, credit growth in 3 remaining months is about 1.83% per month Besides thelack of uniformity in lending growth, other reports also indicate that, to the end of

August 2010, the total balance of deposits in credit institutions (CIs) achieved17.8% growth.

Although there are many preferential policies for rural agriculture, exports andproduction in key areas, credit growth over time has not been as high as expected.The main reason is due to the interest rate The number of enterprises enjoyingpreferential interest rates is small; therefore, the high interest rate preventsenterprise from assessing bank funds Confronted with this situation, theGovernment has made resolutions, including the request for the State Bank tourgently lower saving rates down to 10%, lending rates to 12% But in fact, thisgoal is very hard to achieve, according to Economic Committee, so that making itdifficult for manufacturing operations and business of the business and affecting theconfidence of the market

The lack of stability in the credit markets are still reflected in the growth of foreigncurrency loans The growth was much higher, at 44% compared with 14.5% creditgrowth in USD by the end of September Explain the problem, Governor NguyenVan Giau said: "If compared with other years, the proportion of foreign currencycredit in 2010 changes a bit, but not unusual In previous years, the demand forforeign currency loans was not much, so banks had to send abroad This year,demand for foreign currency loans increased; therefore, foreign currency creditgrew up, this is normal From 15/10, banks are expected to lower interest rates inVND from the highest level of 11.2% per year to a maximum of 11% per year SBVwill continue to use the tools of monetary policy to support the banks, depending oneconomic developments in order to reduce the interest rate

1.4 The role of banking services for SMEs in commercial banks

With the characteristics of SMEs has been analyzed above, the small and mediumenterprises in Vietnam are small, the potential of poor material Therefore it is

unlikely to invest in modern technological processes to produce quality products,competitive with foreign products have in addition to international standards.

1.4.1 Bank’s position

Credit services create profits for commercial banks.

The banks are the largest financial intermediaries They play an important role inoffshore funds from places which do not provide conditions for profitable lending toareas having profitable lending In other words, the major activities of commercialbanks is attracting idle money from society, otherwise distribute it in the form oflending for profit Commercial banks operate under three primary services: debtservice (to mobilize more funds), credit service (lending to the economy) andintermediary services Three services have a close relationship with each other andlending is still the most important role because it is major profitable creator forbanks

Credit improves the competitiveness of banks

Credit expansion means that banks have access to more customers It also createsconditions for banks to expand their scope of activities and increasingly asserts therole and its position in the economy When banks do not diversify lendingoperations, customer diversification, term loans, and the banks can not survive inthe market economy with the fierce competition of other financial institutions

Credit promotes investment, business development and export-import activities

This is the result of the diverse impacts of innovation in banking activities,especially the banking industry's efforts to mobilize domestic capital fordevelopment investment, innovation in lending policies, and the credit structurebased primarily on the feasibility and effectiveness of each project Bankingservices well developed in both quality and variety, contributing to boosting

Maintenance of economic growth

With outstanding loans to the economy accounting for about 35-37% of GDP, eachyear the banking system contributed over 10% of the total economic growth of thecountry

Creating new jobs and improving incomes and sustainable poverty reduction

Through the credit sources for programs and projects to develop production andbusiness, the annual banking system has contributed to create more new jobs,especially in rural areas The use of lending for this purpose is becoming moreprofessional, transparent and efficient, especially since the policy credit is distinctfrom the commercial credit

Contributing to the protection of ecological environment, ensure sustainable development

This contribution is expressed through the project evaluation and decision for abank loan The projects which are not feasible and harmful for the environment will

be rejected Also after a loan, banks supervise the implementation closely, and focus

on safe and efficient requirements compliance with international commitments andregulations on environmental protection

extremely important The stock market is underdeveloped, the number of listedcompanies remains small, and investment through the stock market is almostnegligible So that when SMEs are in needs of capital, they are still looking forfunds of bank credit.

When using bank credit, SMEs have to satisfy the credit conditions and under thecontrol of banking This main constraint is the important driving force for small andmedium enterprises to operate more efficiently

Businesses who want to use the loan have to provide legal documents, financialrecords, collaterals records, the project loan, and some other records Through thesedocuments, the bank will capture the business situation of enterprises Enterprisesare required to meet the bank's condition to access the loan which means that bankonly finance for feasible production plans and investment projects Therefore,SMEs which have loan demand will build specific and well-founded business plansinputs and outputs contracts These plans must point out the economic indicatorswhich guarantee source of repayment for the bank as well as profit for businesses

As a result, this process will minimize risks for business enterprises

After receiving business financing, the bank will take measures to control activitiesrelated to business loans They can make regular or irregular controls in such theimport of goods, consumer goods, inventory numbers Also, it will promotebusiness activities effectively, enhance business accounting, capacity of production,and create motivation to search more input and output sources

Credit Bank to support the development of small and medium enterprises

In the course of operations, business continuity needs arising production,maintenance and expansion of their business activities All of these arising needslead to the needs of capital In fact, enterprises’ equity can meet only a fraction ofthis demand, so that most enterprises have to rely on debt, including bank credit.Bank credit contributed to provide inputs to production and business for them

Along with the development of technology banking, payment operations occurquickly, safely corresponding raises the efficiency of import and export activities.SMEs have opportunity to expand market share, and receive technological lines ofmachines and equipment In addition, bank credit has a strong impact to the sale ofproducts through the expansion of consumer credit, loans or insurance forindividuals and organizations active in good circulation and trade field.

Bank credit impact the trend of the restructuring production of SMEs

Through the provision of credit to many sectors of the economy, banks can collectand distribute the cash flow effectively Bank credit can regulate capital investment

in industries with high profit rate, and reduce low-margin industries to a minimum.Thereby, the demand-supply relationship changes, and it leads to the change of theeconomy’s structure With the characteristics of small and medium business asmentioned above, SMEs are very flexible to change to meet the new demand

1.5 Factors affecting the banking services for SMEs

1.5.1 Internal factor

Raising capital situation

Specific characteristic of the banking sector is "lending is capital", so if a bankwished to lend more but lacked the ability to raise the required capital, that wouldobviously be a harder brake on their ability to lend The more diversified themobilized funds are, the more favorable conditions for development lending are.Similarly, the operation costs of raising capital also influence lending rates, becauseinterest rates must be sufficient to cover the costs In case excess of supply forcapital over demand, the bank is in trouble also Therefore, lending quality alsodepends on the quality of raising capital, they must be parallel

Credit policy

Credit policy includes factors like type of loans, credit line and terms, interest ratesand fees, solvency of customers, bad debts It can be considered as a guide for allthe staffs to follow towards common goals A successful credit policy means that it

is effective for the loan It should be developed not also correctly but alsoflexibility Because if the policy is too rigid, the bank is difficult to achieve loan, as

a result reduces competitiveness of the bank Besides, interest rates varied for eachtype of loan and terms consistent with business plans of the enterprise will increasethe effectiveness of the loan

The process of credit analysis

When financing for customers, loan officers and the departments concerned have totake steps in the process of credit analysis Credit analysis is the standardizedprocess of credit exposure, analysis, loan collection with clients to identify risks andmeasures to limit risks Fast and cost-saving credit process will ensurecompetitiveness for the bank and effectiveness for SMEs

Quality of Bank staff

Quality of banking staff is crucial to the success or failure of banking in generalcredit operation in particular Loan officers participate directly in all phases of thecredit process, from the first step to the final step Therefore, if they work withoutprofessional level, as well as the lack of responsibility, legal compliance will affectcredit quality In addition, credit officers should have extensive knowledge aboutthe law, economic and social environment, development of the country, the change

of the market to do consultancy work for customers accordingly

Credit information

Credit information has an important role in the management of credit quality.Thanks to the credit information, managers can make necessary decisions relating tolending, monitoring and management of loans Credit information may be obtained

from sources available from the bank (loan records and information among creditinstitutions, analysis of the loan officers ), from the source of customers ( underthe regime of periodic reports, business projects), agency specializing in credit, orfrom staffs and departments in charge The number and quality of informationobtained related to the accuracy of the analysis and review the market situation,customers and to make appropriate decisions

Management capacity

Commercial bank must arrange a scientific manner, ensuring close and harmoniouscoordination among departments within each bank, the entire banking system aswell as other agencies such as financial, legal institutions Management capacitywill facilitate to meet customers' requirements, helping banks to monitor the loans,and capital accounts This is the basis for conducting business credit healthily andmanage credit fund effectively

Facilities for credit operations

To be able to manage and monitor the performance of credit, along with improvingthe quality of policy planning, the banking management, public information,internal control… banks should pay attention to appropriate equipment Fullyequipped with advanced technology in line with the financial capacity and the scopeand scale of operation will enable the Bank to constantly improve the quality ofcredit

often rely on indicators of financial analysis to assess the financial capacity ofenterprises

In some cases, business has great potential for development but the financialindicators are not so good For this reason, SMEs limited ability to access bankloans themselves Sometimes, enterprises intentionally disturb the financialstatements by providing inaccurate information and data so it makes the bankwrongly assess the loans lead to credit risk Consequently the faithfulness of ourcustomers is very important in improving quality of credit service

Collateral

The collateral is one of the important bases for the bank to determine the level ofcredit to customers Banks rely on value and the funding rate of collaterals, todetermine appropriate level of funding Different types of assets have different ratesdepending on funding liquidity, price volatility, and safety

Small and medium enterprises do not often have highly valued asset for collateral

It is confused and lack of transparency between personal and legal property whichmakes difficult for banks in the evaluation capacity of the business Meanwhile,they have no reputation with the banks so loans seem to be very hard to access

Business management and administration

Production of enterprises depends very much on ability to operate and manage thebusiness This capacity is under the influence of qualifications, experience andreputation of the business staffs Experienced and professional leadership team willarrange, and administer the business operation efficiently They also have keenintelligence on decision making when there are changes in the market,correspondingly limits the unfavorable effects to SMEs

Currently in our country's SME sector, management level of enterprises is very low

It is lack of transparency and skills; as a result, capital losses, lower trading results,insolvent accounting, and bankruptcy increases Sometimes the bank's losses are

due to the business ethics Borrowers take advantages of bank loans to carry outillegal, embezzle the fund without the desire to repay the loans, making it difficultfor banks to collect debts.

Prestige of the business

Reputation of the enterprise is represented by the willingness to pay creditors, andcarry out all commitments in the credit agreement

Business plan and loan projects

One of the principles of credit is financing based on the plan of project If thebusiness plan is not feasible, the profit will not be ensured Good business plan willbring profit for firms to cover costs for bank loans, while also have a large amount

of capital for reinvestment

Based on analysis of inputs, outputs, markets, competitor banks can evaluate thefeasibility of projects, and determine capital requirements, credit terms, paymentplan… Normally, the business plans of SMEs are established sparsely lacked ofconviction and foundation for the bank appraisal Some are also highly subjective,based on pure experience

From the perspective of macro factors

There are some basic factors which directly impact on the supply of bankingservices for SMEs as the following:

Business environment: including the institutions and the rule of law serves as the

foundation on which banks and businesses as well as SMEs co-existence anddevelopment

Legal regulation

Current legal regulation in the banking sector is increasingly improved, but theseregulations are not synchronized and did not meet the demands of reality A veryimportant point is the banking sector has close ties with other areas of economic and

social life The provision in the Civil Code, Land Law… all affects the provision ofbanking services for SMEs.

CHAPTER 2: CURRENT SITUATION OF BANKING SERVICES FOR

Military Bank was established in accordance with the Business license no

0054/nh-gp of the governor of the state Bank of Vietnam granted on 14th September, 1994and decision no 00374/gp-ub by the Hanoi people’s committee The operationalduration under the license is 50 years and the Bank operated officially on 4thNovember 1994.the Bank has been established to provide banking servicesincluding receiving short, medium and long-term deposits from organizations andindividuals; making short, medium and long-term loans and advances toorganizations and individuals based on the nature and capability of the Bank’ssources of capital; also including foreign exchange transactions, international tradefinancial services, discount of commercial papers, bonds and other valuable papers,and providing other banking services allowed by the state Bank of Vietnam.The Military Bank serves diversified customers including enterprises andindividuals of all economic sectors, among them there are state-owned, privateenterprises, enterprises with foreign capital and individuals With the motto of safeand efficient operation, the bank always attaches the customer's interest to that ofthe Bank, over the past years the Military Bank has been always the trustedcompanion of customer and its prestige is increasingly strengthened and developed.The growth in capital and the scope of business of the Bank has been always stableand continuous through its 10 year of operation Its charter capital has continuouslyincreased from VND 20 billion in 1994 to 7,300 billion by the end of 2010 MB

maintained its stable development in two years of 2008 and 2009 and affirmed itsreliable and trustworthy name The equity capital reached Vnd 5,300 billion,total assets were Vnd 69,008 billion, total mobilized capital was Vnd 59,279billion while the loan balance rose to Vnd 29,588 billion profit of the bankreached Vnd 1,505 billion, far exceeding the plan of Vnd 1,000 billion andincreasing by 75% as compared with that of the previous year So, after two years

of struggling with the challenges of the financial crisis, MB had delivered a growth

in all operation respects at the rate of 200% as compared with those of 2007.The head office of Military commercial joint stock Bank is located at no 3 LieuGiai Street, Ba Dinh district, Hanoi, Vietnam As at 31 December 2009, the Bankhas one head office, one operation center, 35 branches, 66 transaction officeslocated in cities and provinces all over Vietnam, five subsidiaries and threeassociates

2.1.2 Products and services

Military bank offers a complete range of products and services for personalbanking, corporate banking, and financial institution as the following

(source: http://www.militarybank.com.vn/home.asp )

2.1.3 Organizational Structure

Graph 2.1: Organizational Structure of MB

BOARD OF DIRECTORS

Mr Truong Quang Khanh Chairman Appoint on 29 July 2009

Mr Le Van Be Vice chairman Appoint on 29 July 2009

Mr Nguyen Manh Hung Vice chairman Appoint on 29 July 2009

Mr Dau Quang Lanh Board member Appoint on 29 July 2009

Ms Nguyen Dang Nghiem Board member Appoint on 29 July 2009

Mr Ha Tien Dung Board member Appoint on 29 July 2009

Mr Dao Minh Tuan Board member Appoint on 29 July 2009

There are seven people of Board of Directors They always keep in touch

closely with each other to inform and discuss about the activities of the company,

in order to give out the in time decisions

As the executive organ of the MB, the Board of Management is committed to

serving the interests of the entire enterprise and achieving a sustained increase incorporate value The most important tasks of the Board of Management are definingcorporate strategy, setting the budget and allocating corporate resources Itpublishes quarterly reports and annual financial statements for the Bayer Group andmakes key staff appointments

Besides, head office department, business support, research and developmentoffice… and 103 branches and transaction points contributed to the success ofMilitary Bank over 15 years

Subsidiaries

As at 31 December 2009, MB has five subsidiaries as follows

Name Industry % owned by

bank

MB Asset Management Company

Thang Long Securities Joint Stock

Military Bank Land Joint Stock

Company

(Source: Annual report of Military Bank 2009)

Table 2.1: Subsidiaries of Military Banks

Associates

As at 31 December 2009, the Bank has three associates as follows

the bank

Lang Son tourism, investment &

construction joint stock co.

and fund management

experienced a year of growth when their profits reached and even exceeded the settargets Summing up the activities of Military Bank as follows:

As at 31 December 2009

(Source: Annual report of Military Bank 2009)

Table 2.3: Business indexes of MB

(Source: Annual report of Military Bank 2009)

Graph 2.2: Business indexes of MB

Chartered capital of MB reached Vnd 5,300 billion (increased by Vnd 1, 900billion) from the following sources: conversion of shares issued for the firststage in 2007 (Vnd 420 billion) and shares issued for the second stage in

2007 (Vnd 580 billion), issuance of bonus shares and shares to its employees(Vnd 900 billion) Consequently, the owner’s equity reached Vnd 6,888 billion.Total assets of the bank kept increasing and currently arrived at Vnd 69,008billion, 56 % increase compared with that of 2008 and 18% surpassed

In the general difficulties of the economy, MB has obtained positive businessresults The consolidated profit before tax of MB arrived at Vnd 1,505 billion,increasing 75% compared with that of 2008 and realizing 51% of the targetassigned by shareholder’s Meeting in 2008

The most significant contribution to this results was income from servicingactivities which was Vnd 525 billion, doubly increasing in comparison with that of

2008 MB has held firmly its financial position as one of five commercialjoint stock banks in Vietnam (excluding the newly-equitized state-ownedcommercial banks) that had the highest profit

(Source: Annual report of Military Bank 2009)

Graph 2.3: Business indexes of MB(cont.)

Profitability ratio of MB was fairly high and higher than those of previous year.Although MB increased its chartered capital by several times in order to improve itsfinancial capacity in the last year, the interests attributable to shareholders wereensured and remained high The most impressive growth can be seen at return onequity (ROE) with 26.6% increase, being much higher than that of previous year(2008: 24.5%) Return on total assets (ROA) reached 2.66%, being higher than that

of previous year and the industry average rate (i.e 2%) Earning per share (EPS)

2009 also arrived nearly Vnd 3,000/share

While the liquidity remained worrying problems to many banks, the liquidity ratios

of MB stood at safe levels during the months of 2008 Its liquidity ratio was alwaysmuch higher than the ratio of 1 time required by the state Bank To the end of 2009,this ratio was 2.29 time The portion of short-term sources of this year was muchhigher than that of previous year due to its disbursement to program of subsidy tomedium and long-term loans However, this portion was maintained under thecompulsory rate of 30% as regulated by the state Bank

Capital mobilization

(Source: Annual report of Military Bank 2007- 2009)

Table 2.4: Capital Mobilization of MB during 2007-2009

Although the liquidation remained a concern of many credit organizations,especially at the ending half of 2009, the mobilized capital source of MB kept stableand sound growing At the end of 2009, total mobilized capital of MB stood at Vnd59,279 billion, completing 153% target compared with that of the previous year,which was mainly attributable to deposits from economic organizations andindividuals for Vnd 39,978 billion, accounting for 67.4% of total mobilized amount

Table 2.5: Deposit in term of products

(Source: Annual report of Military Bank 2009)

2.2 Lending services for SMEs at MB

2.2.1 Types of lending services for SMEs at MB

Corporate overdraft

This product allows corporate to overcome daily financial difficulties such as wagespayment, materials …

Benefits:

- Maximum overdraft limit 500 million VND

- Using the limit up to 12 months

Export documents based lending

This product allows corporate to supplement your working capital timely while waiting for oversea payment

Benefits:

- Free of charge advice on preparing export documents

- Competitive fees and interest rates

- Simple and prompt procedures.

- No supplemental collateral

- High discount ratio, up to 98% value of documents

- Flexible tenor, fitting your cash flow for oversea payment

Lending based on specific projects and Lending based on limit Benefits:

- Free of charge consultancy on projects

- Competitive and flexible interest rates

Project finance

Benefits:

- Timely meeting the business expansion demand of business

- Lending and repayment schedules fitting project cashflow

- Competitive and flexible fees and interest rates

- Flexible collateral such as future assets based on loans

Inventories and receivables based lending

Solution for collaterals

Benefits:

- Inventories, receivables are both collaterals and repayment sources

- High lending ratio, up to 80%

- Flexible lending forms: specific projects and limit

- Flexible tenor, up to 12 months

- Competitive policies and fees

Lending product for construction business

Overcome all difficulties for your construction

Product Package: