LV Thạc sỹ_How to boost lending to small and medium enterprises in VID public bank

LEEDS METROPOLITAN UNIVERSITY FACULTY OF BUSINESS AND LAWMASTER OF INTERNATIONAL TRADE AND FINANCE HOW TO BOOST LENDING TO SMALL AND MEDIUM ENTERPRISES IN VID PUBLIC BANK, HANOI OPERATI

LEEDS METROPOLITAN UNIVERSITY FACULTY OF BUSINESS AND LAW

MASTER OF INTERNATIONAL TRADE AND FINANCE

HOW TO BOOST LENDING TO SMALL AND MEDIUM

ENTERPRISES IN VID PUBLIC BANK, HANOI OPERATIONS CENTRE

Dissertation prepared by

Supervisor: …

January 2011

Today, small and medium enterprises (SMEs) have merged as the most dynamic factor inthe development of Vietnam’s economy and it have contributed over 40% to GDP of thecountry Besides, SMEs segment are oriented as a focused and most potential market to allthe commercial banks in Vietnam However not of all the banks succeed to conquer theseclients as its potential of SMEs segment stand And VID Public Bank – Hanoi OperationsCentre is considered as a typical sample

This research is concerned with how to help VID Public Bank, Hanoi Operations Centre tosuccessfully better lending to this potential client segment

The research is set to focus on investigating two main areas: demand of SME’s clients anddemand satisfying capacity of the bank by a process of depth investigation of primary data,some surveys and an interview with some managers of SMEs and one officer of the bank.This information increased to understand the concern of demand which the managers ofSME are interested in the bank, as well the researcher is aware of the product, services,credit process and orientation of the bank for this potential SME sector

Finally, with investigation process on SME clients and the bank officer, the researcher aims

to give the reader a comprehensive understanding of the difficulties that SME clients arefacing to borrow from the bank and the existing troubles of the bank to finance the SMEclients

Firstly, I would like to show my sincere thanks to

TABLE OF CONTENTS

Page

ABSTRACT 1

ACKNOWLEDGMENTS 2

TABLE OF CONTENTS 3

LIST OF FIGURES 6

INTRODUCTION 7

1.1 Background of the study 7

1.2 Aims of the research 8

1.3 Organization of the study 8

CHAPTER II: REVIEW OF THE LITERATURE 10

2.1 Introduction 10

2.2 The definition of credit and its kinds 10

2.3 The customer relationship management (CRM) 12

2.4 Marketing 13

2.5 Customer satisfaction 14

2.6 SMEs’ brief understandings and features 14

2.6.1 SME definitions and functions in some countries and Vietnam 14

2.6.2 The situation of manufacturing and trading of SMEs in Vietnam 17

2.6.3 The difficulties of SMEs in approaching the capital from the banks 18

2.7 Commercial bank system and governing body 19

2.8 VID Public Bank, Hanoi Operations Centre and its lending activities 21

2.8.1 The feature of VID Public Bank 21

2.8.2 Hanoi Operations Centre and its lending activities 23

CHAPTER III: METHODOLOGY 28

3.1 Introduction 28

3.2 Secondary research 28

3.2.1 Internal document 29

3.2.2 Journals and magazines 29

3.2.3 The internet 29

3.3 Primary sources 29

3.3.1 Structured - questionnaire 30

3.3.2 Structured interviews 30

3.4 Qualitative and quantitative data 31

3.5 Data collection and analysis 31

3.6 Conclusion 32

CHAPTER IV: RESEARCH RESULT 33

4.1 Introduction 33

4.2 Questionnaire findings 33

4.3 Interview findings 33

CHAPTER V: FINDINGS AND DISCUSSION 35

5.1 The real trouble with SME lending 35

5.2 Some limitations for lending to SMEs in Hanoi Operations Centre 36

5.2.1 The lack of flexibility of products and services 36

5.2.2 Unreasonable price and fee policy, high FX rate 39

5.2.3 The shortage and unstableness of capital resource 41

5.2.4 The limitation of promotion and marketing campaign 41

5.2.5 Lack of SME segment orientation 43

5.2.6 The weak system of risk analysis and industrial forecast 43

5.2.7 Unskilful staff force 44

5.2.8 Customer management and satisfaction 44

5.2.9 Limit of networks/transaction offices 46

5.2.10 Some advantageous co-operations are not carried out by the HOC 47

5.4 Conclusion 49

CHAPTER VI: RECOMMENDATIONS 50

6.1 Introduction 50

6.2 To better internal factors of the bank 50

6.2.1 Improving and diversifying policies of product and service 50

6.2.2 Building of the system of risk analysis 52

6.2.3 Stabilizing the capital sources 52

6.2.4 Expanding the network 53

6.2.5 Applying attractive price, fee and incentive policies 53

6.2.6 Qualifying sales team 53

6.3 Boosting business co-operations 54

6.4 Pushing marketing, after-sales service and CRM 55

6.4.1 Building CRM 55

6.4.2 Enhance marketing strategy 55

CHAPTER VII: CONCLUSION 57

7.1 Summary of key research findings 57

7.2 Limitations 57

7.3 Conclusion 57

REFERENCES 59

APPENDIX 1 62

APPENDIX 2 64

APPENDIX 3 66

LIST OF FIGURES

Figure 1: The CRM system and operations 13

Figure 2: The classification of SME 15

Figure 3: The definition of SME provided by the Ministry of Industry, Thailand 15

Thailand SME association, [(2006) source from: http://www.sme.go.th] 15

Figure 4: Enterprise categories in Vietnam 16

Figure 5: Summary of financial performance in 2009 22

(Source from: Annual report 2008, 2009 of VID Public Bank) 22

Figure 6: The structure of VID Public Bank 23

Annual report (2009), chart of the organization 23

Figure 7: The comments on fee and price 37

Figure 8: The satisfaction of the HOC’s credit products 37

Figure 9: The rate of non-credit service 39

Figure 10: The competition of fee and price among some commercial banks 40

(Source from: telephone call, email, internal documents or website of those banks) 40

Figure 11: The rate of the price in the HOC 40

Figure 12: rate of marketing and promotion program 42

Figure 13: The customer satisfaction 45

Figure 14: the comment on the shortage of transaction point 46

1.1 Background of the study

In Vietnam, the Small and Medium Enterprises play a very important role, remarkablycontributing on economic development of country as such involving to make over 40% ofGDP, making 50% new employment, 78% of retails, 33% value of industrial turnover thatcounted by Vu Trong (2010) And according to Vietnamese General Statistics Office (GSO,2010), among 349.309 registered enterprises are characterized as SME with a large part ofaround 94% SME is defined in Decree No 56, issued by Prime Minister of Vietnam withscales of capital and staff force quantity in details

With growth of scale and sector diversification, SMEs are mobilizing large capitals Themain sources for SME to mobilize capitals are from banks, shareholders, member ofenterprises, funds, etc In fact, SMEs mostly borrow from the commercial banks And thesystem of commercial banks in Vietnam is diversified with size of capital and lendingproducts Meanwhile, SMEs still got difficulties in approaching the borrowing capitalsources from the banks with many reasons such as shortage of collateral, un-fulfil bankdocument requirement, unfeasible borrowing project, bad debt occurring, etc to solve thisissue, the Vietnamese government and State Bank of Vietnam (SBV) have strongly support

to subsidize SMEs in approaching the borrowing capital from banks And that areremarkable effects so far

As Banking Magazine (2009), there are above 70 banks (local banks; 100% foreign banks;joint venture banks, foreign banks’ office) and financial institutions (FIs) in Vietnam, areoperating dynamically in banking activities And one of them, I would like to mention isVID Public Bank (the bank), one of the first joint-venture banks in Vietnam, wasestablished on 30 September 1991 as a 50:50 Joint Venture Bank between the Bank forInvestment & Development of Vietnam (BIDV), the second biggest bank in Vietnam andPublic Bank Berhad, Malaysia (PBB), the second biggest bank in Malaysia for its assetvalue The bank started operating in May 1992 with a single Branch in Hanoi and has todate expanded its network to all major cities in Vietnam as the public information quoted inthe bank’s website, about VID Public Bank (2010) And Hanoi Operations Centre is one ofremarkable branches of VID Public Bank with positive lending activities, high returns,skill staff force, etc that highly contributes to VID Public Bank’s business benefit

The banking products and services for SME segment in Hanoi Operations Centre are sovarious such as revolving credit (RC), fixed loan (FL), overdraft (OD), other term loans,car financing, remittance, trade finance, cash exchange,…that attract a large numbers ofSME to utilize its products or services However, the lending activities in Hanoi OperationsCentre is not really high efficient as its scale and advantages And this makes me concernand choose the topic “how to boost lending to SMEs in Hanoi Operations Centre, VIDPublic Bank” for my master dissertation And in my study, I am focus on researching thecauses and give out the solutions to better lending activities to SMEs in this bank.

1.2 Aims of the research

This research is aimed of finding the relationship between the SMEs in Hanoi and theHanoi Operations Centre, VID Public Bank in which the SMEs are facing some troubleswith borrowing from the bank and the Hanoi Operations Centre (the HOC) has met someoutstanding obstacles in boosting lending activities to SMEs

And the researcher implemented some methods of research to find the troubles that bothSMEs and the HOC are facing and then from the interviews and questionnaires, the writercollected then analyzed the data to find out the some findings and recommendations assolution to boost the lending activities of the HOC

Participants in the research were some SME managers who were used to banking with theHOC And one credit officer of the HOC was also invited to attend the interview

1.3 Organization of the study

The dissertation includes seven chapters with the initial chapter of introduction thatmentions the background, aim of study as well as a briefing the content of the dissertation

The next chapter is literature review that focusing on some theories and definition of theresearch objects as SME, the bank and some organizations that is relevant to the study

Chapter III is methodology of research with some methods are used to collect the data thendiversified, analyzed to conclude the necessary data Issues concerning data reliability andvalidity and research ethics are also considered in this chapter

The result of the research is mentioned in chapter IV The research utilized some methods

of secondary research, primary data with some internal information and external data.Further more, forms of questionnaire and interview are applied to explore data

The findings and discussion are chapter V, in this chapter, the researcher pointed out thefindings as outstanding troubles why the HOC does not boost the lending activities to SMEsegment

After the findings and the result of the research, chapter VI mainly focused on therecommendation as solution to boost the lending activities in the HOC

Chapter VII is conclusion with summarises of the research findings, evaluates the study interms of significance and troubles, and draws some conclusions about practical issues forlending activities

CHAPTER II: REVIEW OF THE LITERATURE

2.1 Introduction

This chapter reviews the body of literature that is relevant to the current study In the firstsection, some definitions are mentioned to introduce and make them clear as of credit inbanking, customer relationship management and marketing

For the second section is considered as the body of this chapter, some objects are definedand functioned as such: commercial banking system and its operating body, SMEdefinition in some countries and Vietnam and its business situation and the main object –the HOC and its owner

In conclusion, in this chapter will bring out the meaning of some words and phrases thatrelevant to the study’s research objects

2.2 The definition of credit and its kinds

The definition of the bank’s credit: “Credit is a permanent transfer from a value amount

from the owner to capital user for a fixed time and the capital user is responsibility to repayfor the owner a initial value amount and a fee amount Banking credit includes 3 maincontexts:

 transferring capital using right from the owner to user;

 transferring has a fixed time;

 this transferring includes fee

In conclusion, the banking credit is a relationship between the bank and/or economicorganization, individual, household in the society in which the bank play a role of treasury for thewhole society Banking credit is functioned to mobilize the unused capital resources from thesociety and then lend to the enterprises and entities.” (Kieu ,2006)

And other definition of credit: “A credit is a legal contract where one party receivesresource or wealth from another party and promises to repay him on a future date along

with interest In simple terms, a credit is an agreement of postponed payments of goodsbought or loan With the issuance of a credit, a debt is formed Definition of credit (2010) And banking credit is divided into many kinds as follow:

Credit under terms: short term loan (12 month below), medium term loan (above one year

to five years) and long term loan (above 5 years) This term will be applied for eachdemand of customers about the capital Normally, the short term loan is applied forworking capital facility, medium term loan is utilized for medium facility and demand, and

the long term is used for the fixed assets and constructing projects

Credit under collateral: (1) the loan has mortgaged property, the loan fully or partly

secured by the collateral; (2) the loan is clean (without collateral)

Other kinds of credit: under industry and economics, credit objective, purpose of credit,

etc these kinds show the diversification of the bank in creating more credit facilities

In current economy of Vietnam, the major customers are enterprises so that the credit forenterprise takes a big ratio of total loans for economy Therefore, the commercial banksnon-stop developing the standard of products and services, diversifying the loan facilitiesfor SMEs with aim of attracting more clients and earn more profits Generally, the creditfacilities are utilized for SMEs included:

Short term loan: this loan is not excess one year And this loan takes the biggest amount of

the bank’s loan This loan mainly meets the demand of SMEs for working capital Andshort term loan included these products:

Overdraft: is one of the short term credit product in which the bank allows the customer to

withdraw the cash over balance in its current account This total cash amount will be setinitially by the bank when the customer submits the loan facility Normally, the overdraft isserviced for the enterprise to purchase the permanent cost as office rental fee, staff salary, taxprepayment, and other mobile payments

Lump sum facility: is one of the short term loan facilities, the facility will be set under a detail

business project via business contract or deal The release for this facility will be done by theprocess of the contract or business project This facility is rather popular to the SMEs and thebanks Because this facility will focus on the newcomer borrower or normal financialstatus enterprise and the lump sum facility will be basic for the bank to consider granting

the limit facility The withdraw tenor is 1, 3, 6 or 9 months At the end of the tenor, theborrower must repay the loan’s principle and interest

Credit limit facility: this facility is normally revolving credit facility to finance the

working capital demand, L/C payment, bank guarantee, import tax guarantee and someother purposes The limit facility takes one year and the tenor is 1, 3, 6, 12 months Theconditions and terms for SME is granted a facility is rather difficult than the lump sumfacility Thus, the limit facility for the customer can utilize frequently during one year Andeach drawdown, the customer only show the output contract or business plan then the bankwill consider the feasibility of the project

Fixed loan facility: is the facility with medium and long term duration, this facility finances

the purchase and import fixed assets as: machines, equipments, vehicles and constructing Thefixed loan facility has a long tenor from above 01 year to 10 or 15 years that is up to the projectand investment reimburse of fixed assets This facility is ordinarily secured by fixed assets that

be financed by the bank And the payment method is instalments and divided into monthlyrepayment for principle and interest

2.3 The customer relationship management (CRM)

“Customer Relationship Management is a comprehensive approach for creating,maintaining and expanding customer relationships CRM is about creating the feel of hightouch in a high tech environment” Kerr, (C2002)

Customer relationship management (CRM) helps the companies improve the profitability

of their intersections with customers while at the same time making the intersectionsappear friendlier through individualization To succeed with CRM, the companies need tomatch products and campaigns to prospects and customers – in other words, to intelligentlymanage the customer life cycle

CRM is defined of customer relationship management in its broadest sense simply meansmanaging all customer interactions In practice, this requires using information about yourcustomers and prospects to more effectively interact with your customers in all stages ofyour relationship with them We refer to these stages as the customer life style

 Acquiring customers

 Increasing the value of the customer

 Retaining good customers

Herb Edelstein, (2010)

To day, recognize this importance of this CRM system; most commercial banks in Vietnamhave applied this method to manage and explore the values from their existing customers.This is a comprehensive solution with aim of creating, maintaining and developing thecustomer relationship

CRM not only includes the general information of customer as: name, address, financialaccounting information, etc but also includes the demand, customer’s comment onproducts and services of the bank

Figure 1: The CRM system and operations

According to Doyle, P(2000): “ The management process seeks to maximize returns, toshareholders by developing and implementing strategies to build relationships of trust withhigh-value customers and to create a sustainable differential advantage”

2.4 Marketing

“Marketing management is process of planning and performing the plan, valuing,promoting and delivering the products, services and ideas to make the exchange with thegroup of target, meet the demand of clients and organizations.” Phillip Kotler, translated

by Vu Trong Hung (2003)

Along with international integration of Vietnam, the banking business of Vietnamesecommercial banks more and more face up with the competition from the famous and strongfinancial institutes or banks as HSBC, ANZ, Citi Bank, Standard Chartered Bank,Deutshebank, Societé General, etc In order to survive and develop, the local commercialbanks have invested a lot of money and power for marketing strategies And marketingactivities in banking industry comes to be very popular and essential Banking marketing is

a management system in order to hit the target of satisfying the demand of capital, servicesfrom the banks to focused group of customer

Martin, C(1995) stated: “Marketing is concerned with customer satisfaction and with theidentification of marketing opportunities; it is also concerned with harnessing of the firmresources and the focus of those resources upon the most appropriate opportunities”

2.5 Customer satisfaction

It is a reality that no business enterprise can exist and develop without customers Thus, it

is really significant to work closely with the customers and ensure that the service youcreate for them is as close to their requirements as you can control

The connection among satisfaction, service, sales and profits are direct and closed, themore customer feels satisfied, the more customers use the service And when the customersare satisfied, they may be willing to introduce their friends or relatives as potentialcustomers

According to Gerson, R (1993), when a products or service meets or excesses a customer’sexpectation, the customer is usually satisfied

In order to meet the satisfaction of the customer, the enterprise need to daily better itsservice or product And make sure that the service or product is competitive with otherenterprises According to Raab G et al (2008) “ A customer will only maintain arelationship with company if the products and services being offered lead to satisfactionand are better than alternative offers Therefore, it is of fundamental importance that acompany compares its service with that of competitors”

2.6.1 SME definitions and functions in some countries and Vietnam

Different countries have different definitions of SME Generally, the SME is classified bythe number of employees and the amount of capitals/turnover

In European Union (EU), the SME is defined as follows: Enterprises qualify as micro,small and medium-sized enterprises (SMEs) if they fulfil the criteria laid down in therecommendation which are summarized in the table below In addition to the staffheadcount ceiling, an enterprise qualifies as an SME if it meets either the turnover ceiling

or the balance sheet ceiling, but not necessarily both Source from: the SME definition asrecommendation 2003/361/EC (2003):

Enterprise category Headcount Turnover or Balance sheet total

Figure 2: The classification of SME

And Thailand introduced the SME with the definition is based on the number of salariedworkers, and fixed capitals An enterprise is categorized as an SME since it has employeesless than 200 and fixed capital less than baht 200 million, excluding land and properties.SMEs in Thailand are classified in three sections: production, service, and trading

Figure 3: The definition of SME provided by the Ministry of Industry, Thailand Thailand SME association, [(2006) source from: http://www.sme.go.th]

Employees Capital

(million baht)

Employees Capital

(million baht)Production Not more than 50 Not more than 50 51-200 51-200

Service Not more than 50 Not more than 50 51-200 51-200

Wholesale Not more than 25 Not more than 50 26-50 51-100

Retail Not more than 15 Not more than 50 16-30 31-60

The SMEs in all countries play an important role in development of economic growth,creating more working chances, contributing to enhance international integration, etc And

on the process of doing business and growing, most of SMEs have been banking with thefinancial institutes or banks However the SMEs some times have met troubles inapproaching with loan facilities from the banks The obstacles, the SMEs have met as:enterprise management, unfeasible project, unclear financial account, shortage ofcollateral, scope of chartered capital, etc

And in Vietnam, one enterprise is remarked as small and medium enterprise when it issatisfied by two main legal policies: (1) the enterprise is registered and licensed byDepartment or Ministry of Planning and Investment under Enterprise Law issued in 1999and amended in 2006; (2) operated by Decree No 56/2009/NĐ-CP of Prime Minister dated

30th June 2009 for supporting and subsidizing the SMEs of Vietnam

And according to the Decree 56/2009/ND-CP, SME is defined as following: SME isbusiness enterprise which registered by the law in force and it is divided into 3 levels:micro enterprise, small enterprise and medium enterprise, this division is based on totalequity (total equity is equivalent to total asset that noted in balance sheet of enterprise) orthe yearly average of employee (the main factor of decision is total equity), as belowdetails:

Level / Sector

Micro –

Quantity of employee Total equity

Quantity of employee Total equity

Quantity of employee

I Agriculture, forestry and

aquiculture

Less than 10 employees

VND 20 billion downwards

above 10 to 200 employees

Above 20 to 100 billion VND

VND 20 billion downwards

above 10 to 200 employees

Above 20 to 100 billion VND

Above 200 to

300 employees III trading and services Less than 10

employees

VND 20 billion downwards

above 10 to 200 employees

Above 20 to 100 billion VND

Above 200 to

300 employees

Figure 4: Enterprise categories in Vietnam

As the above table, SME in Vietnam is divided in 3 main sectors; total equity is below 200billion dong and the number of employment of below 300 ones And the functions ofSMEs are mentioned below:

Creating job and increasing benefit for employee: The first priority of SME is benefit

earnings Unostentatiously, the appearance of SME solves the problem of job for manyemployees Because of diversification of business sectors, the SME can recruit theemployees in various level of skill

Contributing to the speed of growth of economy: Since forming, SME have explored

and utilized effectively latent economic resources Actually, SME’s activities contributesignificantly to the growth and development of Vietnam’s economy

SME makes economy more active and diversified: With feature of capital and scope of

operating; SME have capacity of changing trading goods speedily, shifting producing andrenew technology, etc to match with market demand and the fluctuation of economics

SME contributes to increasing turnover for State treasury: Yearly, SME contributes

about 30% of Vietnam’s GDP, 30% value of industry output, around 80% total retailsturnover, 64% total output of transportation and 100% of some products of art and craft

[Policy for subsidizing the SMEs, (2010)]

2.6.2 The situation of manufacturing and trading of SMEs in Vietnam

The economy of a nation is accumulated by all kind of enterprises that included bigenterprises, small enterprises, medium enterprises and micro- enterprises and most bigenterprises grow from SMEs Thus, the writing overviews the current situation of SME’smanufacturing and trading as follows:

Ownership method: the SMEs are existed under many kinds of different ownership as:

state owner (state enterprise), team owner (joint stock enterprise), and individual owner(one member limited enterprise), etc and as Decree No 56/2009/NĐ-CP of Prime Ministerdated 30th June 2009, the SMEs take a large part of 94% of total enterprises in Vietnam

Business operation fields: the SMEs of Vietnam have a diversified kind of business as:

industry, manufacturing, processing, trading, service, etc In recent decade, the economy ofVietnam is blooming with foreign investment and support policies of the government The

business operation is strongly developed in manufacturing and trading And the enterprisesmainly centralized in big cities, towns and developed industrial areas

Chartered capital status: as the Decree No 56/2009/NĐ-CP of Prime Minister dated 30th

June 2009 total of SME’s capital is not excess VND100 billion In fact, the capital ofSMEs are small and divided into kind of business as follows: (2) Big chartered capitalcentralized in heavy industry as steel manufacturing, ship building, auto producing andinstalling, constructing & real state investment, etc; (3) medium chartered capital isfollowing business kinds: consumption goods production, handy craft making, trading andimporting, etc (3) small chartered capital: services, small producing and processing,entertainment, etc

Equipment, technology and manufacturing tools: Currently, some strong enterprises

have imported new and modern technology machines to support for producing better goodsand products to compete with imported products from overseas However, there are manysmall enterprises with low chartered capital who can not afford to import new technologyand expensive machines from developed countries As such, they still use the usedmachines and Chinese machines that will take more time, cost and human resources toproduct same products That is main reason to reduce the producing turnover

Output market: The population of Vietnam is around 88 million with 65 provinces and

cities that is big market for SMEs Meanwhile, at present the Vietnamese products areviolently competitive with Chinese, ASEAN countries, Japan, Korea and EU countries Assuch, the Vietnam SME must increase the quality of products and services to attract local

consumers

Human resources and employees: With nearly 88 million populations, Vietnam has owned

young generation in the age of working Besides, the government has invested to openmany technical and vocational schools to train the employees who have enough skill towork in factories and industrial zones Especially, the employee expense in Vietnam ischeap compares with other countries in Asia

2.6.3 The difficulties of SMEs in approaching the capital from the banks

Small scope of business and low chartered capital: The most difficulty of SMEs in all

countries in general and in Vietnam in particular is the capital source to produce and trade.Firstly, due to the low chartered capital, small total assets and small scope So the SMEsare not easy to be listed on the stock exchange market to mobilize via their shares As such,the SMEs have been mobilizing the capital through two sources: main from the bank andthe other (relatives, sharing)

Unfeasible business project: Due to the limit of knowledge and experience in building a

financial plan, investment project and the enterprise does not show a feasible plan topersuade the bank for a loan facility

Out-of-date technology: And most of small enterprises have operated in small scope with

underdeveloped technologies and machines, unqualified employees, etc Hence, the outputproducts are not easy to compete with imported goods And some SMEs have not appliedcorrect accounting forms that do not reflect the truth of business and finance of theenterprise

Unqualified Management: The management skill of the enterprise owner is not enough

qualified or well –educated Most of them have become from the small business workshop

or small entity owners so they do not have a high business administration to operateeffectively Besides, they have a limit of understanding the business law, regulations,international trade law and utilizing the high technology Accordingly, the SMEs are easy

to be damaged

Lack of assets and property for the bank’s mortgage: the SMEs have owned small total

assets, low value machines and fixed assets so that it is not enough assets to secure for thebank And with a not so strong finance situation, the bank rarely finance with cleanmortgage

Due to the above disadvantages that SMEs are more and more difficult to get in touch withthe capital resource from the bank And the lack of the capital for investing andmanufacturing is rather popular to SMEs at present

2.7 Commercial bank system and governing body

The law of credit organizations No.47/2010/QH12 issued by Vietnam National Assembly

in 16 June 2010 defined: “The bank is kind of credit organization which is allowed to carry

out all the style of banking business operations under this law Based on the feature and operating target, the kind of bank included: commercial bank, policy bank and investment bank.”

Currently, the system bank of Vietnam includes: 05 state commercial banks, 37 joint stockcommercial banks, 05 joint venture banks, and 05 (100%) foreign banks, 48 branches

of foreign bank, 48 representatives, 17 financial leasing and other Financial

Institutes (Source from: State bank of Vietnam (2010) the quantity of commercial

banks)

State commercial bank (SCB), the bank which is invested by State It established andoperated to perform the targets of State The management team is designated by theGovernor of State Bank of Vietnam

Joint stock commercial bank (JSB) is a bank which is set up under one kind of a joint stock

enterprise It is allowed to operate the banking business activities as such: capitalmobilizing, lending, trade finance, FX, leasing, etc

Joint venture commercial bank (JVB) is bank which established by (50:50) one Vietnam

bank and one or more than one foreign bank JVB is a legal entity of Vietnam; thehead office is located in Vietnam The JVB is allowed to do business as such: capitalmobilizing, lending, trade finance, FX, leasing, etc

Foreign bank is 100% foreign bank is licensed by State Bank of Vietnam and it has right to

operate as a Vietnamese commercial banks in banking business as: mobilizing,lending, FX, etc

The commercial bank plays an intermediary role of finance of crediting includesarrangement for crediting between the depositors and borrowers; paying amongenterprises in economics: the bank carry out the crediting or debiting from thisenterprises to others

And the bank has other function of mobilizing from the individuals or enterprises; thisfunction helps the economy more stable and the State Bank of Vietnam orgovernment use system of commercial bank as a tool of adjusting the macro-economy

Besides, the commercial bank is used by government to perform the policies in supportingand enhancing the producing, pushing back and dominating the inflation, stabilizingthe value of currency and rate, improving the macro-economy, investment andmanufacturing environment.

The commercial banks have supported effectively in creating more new jobs and attractmore employees, improving income and decreasing the poverty

On 6th May 1951, the President Ho Chi Minh signed a Decree No 15/SL to establish theNational Bank of Vietnam (now is State Bank of Vietnam) with major functions: managingthe issue of currency, organizing circulation of currency, administrating State Treasury,carrying out the credit policy in order to increase the production, etc

And on 16th June 2010, the law of State Bank of Vietnam (SBV) and creditingorganizations has been officially approved Under the law, SBV is a Body similar to theMinistry of the Government The SBV performs the function of state management onmonetary, banking activities & FX, monetary issue, issuing the policy and orienting thesystem of commercial banks The bank plays a very significant role of stabilizing the value

of currency, ensuring the safety for banking activities, national balance of payment andcrediting organizations

The functions, authorities and assignments: Pursuant to the Decision of Prime Minister ofVietnam No 96/2008/NĐ-CP dated 26th August 2008, the SBV has rights, assignments andits functions in brief:

Submitting to Prime Minister for the orientation and strategy of developing nation’s targetsand focused on important project relevant to the banking industry

Planning, writing and submitting the national monetary policy to the Prime Minister andNational Assembly; the SBV give out the policies of interest rate, exchange rate,compulsory reserve rate, open market and other tools to manage the policy of monetarythrough the system of commercial banks

And the SBV function to check, inspect and supervise the banking activities as such: creditcontrol, foreign exchange management, interest rate compliance, risk warning and control, etc Besides, the SBV executes to license the opening of the bank or branch, co-operates withinternational organization as WB, IMF, ADB, ODA projects, etc

2.8 VID Public Bank, Hanoi Operations Centre and its lending activities

2.8.1 The feature of VID Public Bank

VID Public Bank, is a joint venture bank between Bank for Investment and Development

of Vietnam (BIDV) and Public Bank Berhad, Malaysia in Vietnam under Banking license

No 01/NH-GP issued by State Bank of Vietnam on 25th March 1992 The license of thebank is valid for 20 years from the issue date The principle of VID Public Bank is carryingout banking activities As at 31 October 2010, the bank has 513 employees (31 December2008: 278 ones) Currently, the bank has one head office in Hanoi and 8 branches in maincities as such: Hanoi, Ho Chi Minh city (02 branches), Da Nang, Hai Phong, Dong Nai andBinh Duong

VID Public Bank (the bank)’s total assets stood at USD354,92 million as at 31st December

2009 representing an increase of 22,9% or USD66.21 million compared to USD288.71million in 2008

Total deposits increased by 31.4% or USD65.97 million from USD210.02 million in 2008

to USD275, 99 million in 2009

Gross loans and advances increased by 29.1% or USD27 million to USD223.16 million in

2009 from USD172.89 million in 2008, reflecting the bank’s concerted efforts inimplementing effective marketing strategies to achieve a strong loans growth In addition,the bank’s net non-performing loans (NPL) ratio has improved significantly from 3.2% as

at 31st December 2008 to 2.0% as at 31st December 2009 as at the result of the bank’sprudent lending and credit policies

Profit before tax decreased by 5.8% or USD0.57% million from USD9.73 million in 2008

to USD9.16 million in 2009 mainly due to lower interest rate margins from the cappedceiling lending interest rates for commercial loans vis-à-vis increasing deposit interestrates Moreover, profitability was affected by the decrease of USD interest income receivedfrom money market operations and lower gains from foreign exchange

Figure 5: Summary of financial performance in 2009

(Source from: Annual report 2008, 2009 of VID Public Bank)

Figure 6: The structure of VID Public Bank Annual report (2009), chart of the organization

2.8.2 Hanoi Operations Centre and its lending activities

Hanoi Operations Centre is the first branch of the bank, was established in 1992 The HOC

is located at the centre of Hanoi, in the dynamic street “wall street of Hanoi” with statebank head office and other commercial banks There are nearly 60 employees with 07departments includes: customer service department, trade finance department, treasurydepartment, credit business department, credit back office department, administrationaccounting department and IT department And below is the function and role of alldepartments:

Credit Business Department: Research and build the customer strategy, customer

clarification and recommend the business policy for each customer Set up the plan forlending with the orientation of the board of managers and head office The businessdepartment directly process the following works: (1) carrying out the loan propertyevaluation, business and producing supervision, loan management; (2) implement

Hanoi Operations

Centre

Hai Phong branch

Ho Chi Minh Branch Cho Lon branch

Da Nang branch

Dong Nai branch

Dong Nai branch

Binh Duong branch

Network development Dept

Marketing &

Product Dept

IT department

HO Credit Department

Board of Director Board of Controller

Assistant Department

General Director

Branches Network

borrowing guarantee, biding guarantee, payment guarantee and value papers discount ormortgage; (3) deploying the mobilization of VND and USD money from the residents andorganizations (4) set up, collect and write the monthly, quarterly and yearly report to thehead office and State Bank of Vietnam for loan status in the bank (5) Implement to checkand follow after releasing the loan.

Credit back office department: controlling the credit documents that are fully compliance

with the internal policy and State Bank of Vietnam about the credit policy After the creditbusiness department completed the loan process and the credit back office department willrelease the loan as the approval of manager This department will control after releasing asinforming loan date, recalling the loan amount, tracing the bad loans Besides, thisdepartment will store all the important documents of the loan

Treasury department: build the plan for a stable capital source for business of whole year.

Performing the mobilization program through the market 1(residents and organizations)and 2 (inter banks or financial institutes) Implementing to sale and buy the source ofcapital between the branch and head office; Arranging the source of foreign exchange tosale and buy with import and export enterprises; Increasing business to hit the target ofprofit under the assignment of management board; and advising the board of managers onthe policy of interest rate and FX rate daily

Accounting administration department: implement accounting, statistics and payment

under the regulation of State Bank of Vietnam and the head office’s guideline Building upthe financial and accounting plan for whole year; setting up the payment and collection,balancing the profit and loss under the business budget Managing and using the fund ofthe HOC under the control of head account and management board

Synthesizing, storing the internal documents, accounting documents and some value papersunder the appointment of management board

Trade finance department: Daily quoting the transaction rate of FX, implementing the sale

and buy the FX to do the domestic and international payment, transacting the importingand exporting process, opening and issuing the L/C and other documents relevant to theimport – export documentaries Issuing the international payment guarantee among thebanks

Co-operating with business department and treasury to do transacting the FX with loancustomers; And advising the management board of the policies of FX rate, tenor andmethod of payment and dealing.

Customer service department: is front office who daily works with all customers who

come to do transactions with the HOC The main duties are opening account (currentaccount, demand account, specific account, savings account, etc.), implementing thedemand of customers as cash withdraw, deposit, certificate of deposit, foreign exchangedeal, managing the value papers, printing bank statement, issues cheques, bill, etc anddaily this department will do transaction with other banks for FX, VND cash changing,

depositing and dealing

Human resource department: setting up the staff force strategy for annual,

implementing the recruitment, interview and offering the salary and commissionpolicy Appraising the staff performance monthly, quarterly and yearly then report

to the management board to rate the staff In addition, the human resourcedepartment advices the board of management about the salary and bonus policybased on the result of business

IT support department: in the bank, the IT plays a very important role in daily

transaction of the bank As such, IT has a important duty of controlling the system,supporting other department in transacting, setting up the data management, riskcontrol and co-operating with IT centre in head office to keep in touch with headoffice and State Bank of Vietnam

The brief business of the HOC: The total loans as at 31 December 2010 is USD44.686

million, includes both individual and corporate client loans, total deposits of USD64.862million and profit before tax of nearly USD1,826,706.85

Currently, the HOC is launching the following products and services:

 Current Account

 Current Account Plus

 Fixed Deposits

 Certificate of Deposits

 Phone Banking, ATM, etc.

The mobilization activity: The mobilizing is one of the most important activities of the

bank and the key factor of business activities Thus, the bank only lend out if it has a stablecapital resources from mobilizing in market 1 (deposit mobilizing from individuals,enterprises, organization, etc excludes financial institute) And the products formobilization as: Demand deposit, fixed deposit, current account plus, flexible deposit andcertificate of deposit On the other hand, if the bank mobilizes with low rate of interest andcost, it will get more profit or earnings A plentiful mobilizing capital will help the bank tostabilize payment capacity, this is very important to a bank

Most of customers for deposit products are: individuals in area around the bank, the localenterprises and organizations and FDI enterprises, etc

In Vietnam, the mobilizing market is so fiercer among the banks And ifthe commercial banks want to mobilize they need to issue thecompetitive interest rate or special promotions Meanwhile, the HOC isjoint venture with Public Bank Berhad, Malaysia as such the HOC has agood relationship with Malaysian, Chinese investment enterprises tomobilize This advantage helps the HOC to hit the target of mobilizingthat issued by head office As at 31 December 2010 the total depositmobilizations are USD64.862 million, the ratio for individual clients hit over 29% andthe corporate clients and other financial institutes is over 70% of total deposits

Lending activities: In Vietnam, the lending activities of the

commercial banks bring back mainly turnover and profit for theirbanking business And VID Public Bank does not stand out of these

activities and the total outstanding loans of about USD44.686 million as at 31December 2010 In these loans includes over 20% come from individual customers, nearly10% of big corporate customers and over 70% come from SMEs clients And as theorientation from the Board of directors of the bank noted in the term of Outlook andorientation 2010: “VID Public Bank will continue to capitalize on its strengths to its corebusiness activities particularly consumer financing and retail commercial lending to SMEswhile continuing to maintain its prudent credit policies and practices to maintain a healthybalance sheet.” (Annual report 2010: outlook and orientation 2010, pg 9)

The SMEs lending activities play a significant role to increase the profitfor the bank Indeed, the bank not only can earn the lending interest butalso hit the transaction fee, trade finance fee (L/C, TT,), bank guarantee,

FX, etc Furthermore, the SME segment is the most dynamic sector withthe commercial banks in Vietnam And according to Vietnamese General StatisticsOffice (GSO, 2010), among 349.309 registered enterprises are characterized as SMEs with

a large part of around 94% of total enterprises in Vietnam

CHAPTER III: METHODOLOGY

3.1 Introduction

This methodology chapter is concerned with the framework in which the research wasconducted In the research, the researcher will use both method of collecting resources anddata: secondary sources and primary sources; and also use a combination of methods,quantitative and qualitative methods to collect the data and analyze them for theinformation they contain In the research design, with the source from internal documents,and the research with structured questionnaires, semi-structured interviews are presentedwith justification

The reason why the above methods are used for this research is internal and public data tocompare and cross-check with data collected by interview or questionnaire

Besides, the writer utilized secondary sources to collect data and resources through the ideaand words of some other writers in the public reports to enrich the reality anddiversification of data

Secondary data is research already published, and is cheap for research process because thedata already exists for acquiring Though, there still are some disadvantages in utilizing thesecondary research which the researcher needs to pay high attention Because this is a veryimportant thing in order to evaluate the accuracy and validity of the data that are collected

3.2.1 Internal document

The reports and information are used for this dissertation are primary data but this research

as secondary data And the data was collected to utilize for other purpose of the bank.Actually, all the data are used in this research strictly obey the internal policies of the bankfor revealing information

3.2.2 Journals and magazines

Some text books and magazines are so worth to the process of the researcher in collectingdata The information in books and magazines are collected and written carefully andorderly And the books and magazines are mentioned in many fields as: financing, banking,marketing, statistics, etc

3.2.3 The internet

Today, the internet is so popular and useful to individual, enterprises and organizations it iseasier to explore and collect information and data via internet The advantage of internet isthat the information are updated and added quickly with various information and titles.Meanwhile, the disadvantage of information on internet some times includes the fakeinformation As such, the researcher must filter and select the correct and genuine data

3.3 Primary sources

Primary research involves in obtaining original data directly from the objectives of theresearch and the research’s data that did not exist before This research method includes ofsurveys; questionnaires; structured interviews; observation; case studies; etc According toBryman, A& Bell, E (2007): “Survey research comprises a cross-sectional design inrelation to which data are collected predominantly by questionnaire or by structuredinterview on more than one case and at a single point in time in order to collect a body ofquantitative or quantifiable data in conjunction with two or more variables, which are thenexamined to detect patterns of association”

Primary research will be regarding to actual status of lending activities to SME segment inVID Public Bank, Hanoi Operations Centre via interviewing some managers and creditofficer And structured interviewing questionnaires are designed to interview some bankingcustomers from SMEs in Hanoi for their demand and difficulties to borrowing process in

3.3.1 Structured - questionnaire

Questionnaires are defined by Brown (2001) as “any written instrument that presentsrespondents with a series of questions or statements to which they are to react either bywriting out their answers or selecting them among existing answers” (p 6)

The original questionnaire, the one used in study, consisted of ten questions And thequestionnaires are used as quantitative method to capture the ideas and comments from theSME managers who have been banking with the HOC From these comments, theresearcher has found out the difficulties and problems that the SMEs are facing with thelending from the HOC

To have a successful questionnaire, the interviewer should be clever with question form,content and ordered design “A skill interviewer should be able to achieve good rapportwith nearly all interviewees in the face-to-face situation.” Colin Robson (2003)

Although the questionnaire is so useful and effective, some limitations of questionnaireappears as the answer or information collected without evidences “questionnaires onlyprovide reports of what people say they think or do and not direct evidence of it” (Hyland,

2002, p 166) Thus, the interview, internal and public documents are used to cross-checkedthe reality

The questionnaires with 10 questions in A4 print were handed over to 06 managers of SME

in Hanoi who have been banking with the HOC

3.3.2 Structured interviews

“The structured interview is one of a variety of forms of research interview, but it is theone that is most commonly employed in survey research The goal of the structuredinterview is for the interviewing of respondents to be standardised so that differencesbetween interviews in any research project minimized” Alan Bryman & Emma Bell(2007) While highly structured questionnaires allow the researcher to take control of thequestioning, interviews provide participants with an opportunity to elaborate on theiranswers

To explore and achieve the needed information, the interview must have focused andtargeted object According to Colin Robson (2002): “Interviews can be used as primary oronly approach in a study, as in a survey or many grounded theory studies”

The interviews were carried out with the HOC’s officer who directly involves in process ofgranting the loan facilities to SMEs The interview format with 10 questions printed in A4paper were interviewed one officer Since then, the researcher finds out the limitations orsolutions which are revealed

3.4 Qualitative and quantitative data

Popularly, there are two main approaches in implementing the research process:Quantitative research and qualitative research

Qualitative data are mostly collected through personal interview to capture the meaningsvia spoken words As Bryman, A& Bell, E (2007) stated: “Qualitative research would seem

to have monopoly of the ability to study meaning Its proponents essentially claim that it isonly through qualitative research that the world can be studied As Platt (1981:87)observes, this contention seems rather at odds with the widespread study of attitudes insurveys based on interviews and questionnaires.”

Quantitative data performs a process of gathering and analyzing the data that can beexpressed in numerical form Quantitative research involves data that is measurable andcan include statistical results, financial data, or demographic data, etc And this methodrequires the data are ensured at a high level of accuracy and validity

3.5 Data collection and analysis

After collecting data, the data analysis process is very important in whole process ofapproach As Bryman, A& Bell, E (2007) wrote: “One of the main difficulties withqualitative research is that it very rapidly generates a large, cumbersome data-base because

of its reliance on prose in the form of such media as field notes, interview transcripts, ordocuments Miles (1979) has described qualitative data as an ‘attractive nuisance’, because

of the attractiveness of its richness but the difficulty of finding analytic paths through thatrichness…”

Data analysis will cope with strong and weak points of the bank in lending activities toSMEs Besides, this makes an understanding the SME customers’ behaviour and demand

in banking products and services in the bank

3.6 Conclusion

In this chapter has outlined the method of research with detail about the researchinstruments, procedures, data collection and analysis, research reliability and validity, aswell as research ethics With effective methods and implementation of these, the datasupporting for the study And methods of data collection included structuredquestionnaires, structured interviews, and internal documents that are employed as theprimary method of data collection Research reliability and validity were obtained andissues concerning research were dealt and cleared with