LV Thạc sỹ_Current situation and solution for the development of personal lending activity in HSBC hanoi branch

Peter Rose has definedcommercial banks as follows: "Bank is a type of financial institution which mostlyoffers a portfolio of diversified financial services, especially credit, savings a

With the grateful help from National Economic University, I have a chance

to intern at Hong Kong & Shanghai Banking Corporation (HSBC) Ha Noi Branch Studying at National Economic University, especially in Advanced Program has provided me large range of academic knowledge under international view Besides, three month internship in HSBC Hanoi branch was an actual challenge for me but

it also was a helpful learning course of reality.

First and foremost, my utmost gratitude to PhD …, my supervisor, whose sincerity and encouragement I will never forget Mr… has been guides and supports me from the initial to the final level, as well as helps me to accomplish this thesis.

Secondly, I would like to thank my colleagues at HSBC Hanoi Branch for their useful material and guidelines during the time I was working on important analysis of my thesis.

Lastly, I offer my regards and blessings to all of my family and friend who supported me in any respect during the completion of thesis.

Despite of all the help and effort I have, mistakes may remain in the following page There for, I really expect suggestions from the supervisor to make this report better.

TABLE OF CONTENTS

LIST OF TABLES VII

LIST OF FIGURES VIII

CHAPTER I: OVERVIEW ABOUT LENDING ACTIVITY TO

1.1.Definition and basic activities of commercial bank 1

1.1.1 Definition of commercial banks 1

1.1.2 Basic activities of commercial bank 1

1.1.2.1.Mobilization 1

1.1.2.2.Lending and Investment 2

1.1.2.3.Others services 2

1.2.Lending activity in commercial bank 3

1.2.1 Definition and characteristics of lending activity in commercial bank 3

1.2.1.1.Definition of lending activity in commercial bank 3

1.2.1.2.Characteristics of lending activity in commercial banks 3

1.2.2 Classification of loans in commercial banks 4

1.3.Lending activity for personal customer in commercial banks 5

1.3.1 The concept and characteristics of lending activity to personal

1.3.1.1.Concept of personal lending activity 5

1.3.1.2.Characteristics of personal lending activity 5

1.3.2 Loans Classification for personal customers 7

1.3.2.1.Base on lending purpose 7

1.3.2.2.Base on repayment method 7

1.3.2.3.Base on type of loans 8

1.3.2.4.Base on measurement of loans guarantee 10

1.3.3 The process of lending to individual customers in commercial banks11

1.3.3.1.Application reception 12

1.3.3.2.Credit underwriting 12

1.3.3.3.Collateral estimating 13

1.3.3.4.Reviewing and signing the credit contract 13

1.3.3.5.Disbursement and control while granting credit 14

1.3.3.6.Closing or renew debts 14

1.3.4 Development lending to personal customer 15

1.3.4.1.The concept of development loans for personal customers 15 1.3.4.2.Evaluation indicators 15

1.4.Factors affecting to the development of personal lending activity in commercial bank 19

1.4.1 Objective factors 20

1.4.1.1.Lending policies of banks 20

1.4.1.2.The financial capacity and financial management capabilities of banks 20

1.4.1.3.The quantity and professionalism of credit officers 21

1.4.1.4.Marketing activity of bank21

1.4.1.5.Network of bank 22

1.4.2 Subjective factors 22

1.4.2.1 Factors from customers 22

1.4.2.2 Factors from market conditions 23

CHAPTER 2: CURRENT SITUATION OF PERSONAL LENDING ACTIVITY IN HSBC – HANOI BRANCH 26

2.1 Overview about HSBC – Hanoi branch 26

2.1.1 Formation and development process of HSBC – Hanoi branch 26

2.1.1.1 Overview about HSBC Viet Nam26

2.1.1.2 Formation and development process of HSBC - Hanoi branch 27

2.1.2 Organization structure 28

2.1.2.1 Organization structure 28

2.1.2.2.Function of main departments 29

2.1.3 Business results of HSBC Hanoi branch in period of 2009 – 201130

2.1.3.1 Capital mobilizing 30

2.1.3.2.Business result of HSBC Hanoi branch 34

2.2 Situation of personal lending activity in HSBC Hanoi Branch 35

2.2.1 Lending policy for personal customer in HSBC Hanoi branch 35

2.2.1.1 Borrower: 35

2.2.1.2.Collateral: 37

2.2.2 Number of personal customer in HSCB Hanoi Branch 37

2.2.3.Structure of lending for personal customer in HSBC Hanoi Branch39

2.2.3.1.In term of outstanding loans 39

2.2.3.2.In term of products 40

2.2.2.Quality of personal lending activity in HSBC - Hanoi branch 42

2.2.2.1.Overdue debt ratio 42

2.2.2.2.Bad debt 43

2.2.2.3.Profit form personal lending activity 44

2.3.Evaluation of personal lending efficiency in HSBC Hanoi branch 45

2.3.1.Achievement 45

2.3.2.Limitations and cause 46

3.1.Orientations for lending to individual customer of Hanoi branch 50

3.1.1.The long-term orientation of HSBC Hanoi branch 50

3.2.1.Improving branch’s staff quality 51

3.2.2.Widening the network of branch 52

3.2.3.Promote the branch's marketing activities 52

3.2.4.Improve the quality of loans for personal customers 53

HSBC: Hong Kong and Shanghai Banking CorporationSBV: State Bank of Vietnam

WTO: World Trade Organization

ROA: Return on Assets

ROE: Return on Equity

BOD: Board of Director

LIST OF TABLES

Table 2.1: Fund mobilizing of HSBC Hanoi Branch 2009- 2011 32

Table 2.2: Business result of HSBC Hanoi branch 34

Table 2.3: Number of personal customer in HSBC Hanoi branch 2010-2011 38

Table 2.4: Credit activity of Hanoi branch 39

Table 2.5: Structure of personal loans product in 2009-2011 40

Table 2.6: Overdue debt ratio through personal loan products of branch in period of 2009-2010 43

Table 2.7: Situation of bad debt in personal loans 44

Table 2.8: Profit from personal lending activity (unit: million VND) 44

LIST OF FIGURES

Figure 1.1: Process of lending to individual customers in commercial banks 12

Figure 2.1: Structure of Hanoi Branch 28

Figure 2.2: Capital mobilization in recent years 31

Figure 2.3: Business result of HSBC Hanoi branch in period 2009- 2011 35

Figure 2.4: Personal outstanding loans 2009-2011 41

From the past to present, this trend has been a long term orientation of themajority of join stock bank in Vietnam The foreign banks such as ANZ, HSBC alsopromote many strategies to join in this market after establishment with 100%foreign capital Lending activity to personal customer is still quite small comparewith its potential It is seem not to be exploited fully by commercial bank inVietnam According to statistics from State Bank of Vietnam (SBV), only about20% of populations have personal account and use banking service

Few years ago, personal lending activity has many limitations because

of the low technology which doesn’t meet the requirement of product, and therestricted perception of bank against personal loans which be seen as a riskperspective Most of domestic commercial banks have a wide net-work activityprimarily focus on enterprise lending activity, and the market for personal loans isnot considered significantly This is an opportunity for foreign banks which have

strong capital, well liquidity and diversified revenue when they can take anobjective to serve the small to medium loans, including individual customers

Aware of the important and benefits from the development of personallending activity, and the working process in HSBC Hanoi branch, I select the topic

“Current situation and solution for the development of personal lending activity in HSBC Hanoi branch” for my thesis research

2 Research scope

The overall aim of thesis is giving an overview of the theoretical issue inpersonal lending activity of commercial bank as well as mentioning about currentsituation of personal lending activity in HSBC Hanoi branch from 2009 to 2011

3 Research Methodology

In order to conduct the research, comparative, statistics, mathematicsmethod, economic analyses are used Moreover, secondary data also collected fromvarious sources such as website of SBV, HSBC bank… Simultaneously withsecondary data, primary data also need

4 Research structure

The thesis includes three chapters:

CHAPTER I: Overview about lending activity to personal customer incommercial bank

CHAPTER II: Current situation of personal lending activity on HSBC Hanoibranch in period of 2009-2011

CHAPTER III: Solution and Orientation to improving personal lendingactivity in HSBC Hanoi Branch

CHAPTER I: OVERVIEW ABOUT LENDING ACTIVITY TO PERSONAL CUSTOMER IN COMMERCIAL BANK1.1 Definition and basic activities of commercial bank

1.1.1. Definition of commercial banks

Bank is a type of institution that has an important role to the whole economy

in general and for the each local community in particular Bank can be defined interm of the economic functions it serve, services it offer to customer, and the legalbasis for its existence Along with the development of the economy, the number offinancial institutions has provided many types of banking services such as lending,investment trust, and saving deposit On the contrary, commercial banks alsoexpand and diversify its range of services Therefore, it is easy to be confusionbetween types of banks and other financial intermediaries Peter Rose has definedcommercial banks as follows: "Bank is a type of financial institution which mostlyoffers a portfolio of diversified financial services, especially credit, savings andpayment services, and perform many finance functions than any other businessorganization in the economy”

Commercial bank is an institution which has several of activities likeaccepting deposits, making business loans, investment, and other related service Inmore detail, major operations of commercial bank are: mobilization, lending,investment, payment, foreign exchange, and others business

1.1.2. Basic activities of commercial bank

1 Mobilization

This is the initial operation which considered as the starting activity forcommercial banks Bank can mobilize fund from individual or organization undercustomer’s demand deposit, fixed deposit, and mobilize from other commercial

banks, credit institution in monetary market Fund then can be used for lending orother business investment

2 Lending and Investment

Lending activity: This is one of the most basic and important activity in

commercial bank Lending activity often generate the most profit for bank With themodernization of technology, many modern products are offered such as overdraft,loans from credit card, international debit card….Nowadays, with thediversification of products and services in commercial bank, profit can be broughtfrom many different professional activity, of which from lending still account forvery large proportion

Investment activity: Investment activity includes investment in customer and

trading operations This is a high risk activity because commercial banks carry outtheir business by their capital Most of the loans, liquidity cannot be sold quicklywhen the bank is urgently need cash, therefore the banks began to devote a largepart of its portfolio of assets in investments in another important type of revenueassets - in securities Securities of banks include government securities andregulated by law categories of shares These components of bank portfolios performseveral important functions, providing the bank profitability, liquidity anddiversification to reduce risk, and removal of part of the bank's income from the tax

3 Others services

Payment: This is also one of the main activities of commercial bank There

are two kind of payment: domestic payment and international payment Domesticpayment is the payment between counterparties located in the same country.Internal payment is the payment between counterparties located in differentcountries Due to the geographical and social characteristics, each country usuallyhas advantages in producing a certain product Thus, international trade becomesincreasingly important, which are conducted regularly with increasing in the sizeand the number

Foreign exchange: Foreign exchange is an activity in which simultaneous

buying one currency and selling another This is regard as an important profitableactivity Commercial bank joins international banking system in order to carry outFOREX transactions Some main type of FOREX deals are: spot, forward, swap,future, and option In developed countries, these deals seem to be more and moreattractive to customer Therefore, banks usually use these activities to set up theirprestige abroad

Other business: Beside the above activities, commercial bank also performs

many activities to meet customer demand, for example: guarantee, transferringmoney, trust, leasing, insurance service, etc.… In short, along with themodernization, diversification of products and service is the strategy of banks to thebest customer service

1.2 Lending activity in commercial bank

1.2.1 Definition and characteristics of lending activity in commercial bank

4 Definition of lending activity in commercial bank

Lending is an activity that the bank gives money to borrowers with acommitment of reimbursement of principal and interest in a specified period oftime Lending is the most profitable activity, but highest risk for the banks To get agood-quality loan product, the banks have to compliment a closely customeranalysis process Risks from lending activity are caused from many reasons whichcan lead to bad result or reducing the bank's income

5 Characteristics of lending activity in commercial banks

There are some loans which account for the majority of the capital can pushbank close to bankruptcy Therefore banks always consider and estimate risk andprofitability before decide to lend That is the analysis before and during the loan

The objective of lending analysis is to identify lending risks and makesolutions to limit them Content of lending analysis are income and information

analysis which determine credibility, legal, financial strength and solvency of theborrower in the past, present and future.

1.2.2. Classification of loans in commercial banks

There are many ways to classified loans However, to support for thisresearch topic, the classification of loans in term of customers will beconsider According to this classification, there are three main kinds of loans: loansfor business customer, loans for financial institutions and loans for individualcustomers

Firstly, business customers include State enterprises, Cooperatives, LimitedLiability Company, Joint-stock companies, enterprises and foreign investment,partnerships Form of loans to business customers is very diverse like short-term loans, loans under the credit line reserve and loans under investmentprojects, etc

Secondly, financial institutions customers include banks, credit cooperatives,insurance companies, and finance companies, normally, this lending activity is tomeet short term needs of these banks, and transactions often take place on the inter-bank market

Thirdly, individual customers are all personal customers who have civil legalcapacity according to the law Borrowers are diverse, including customers who needcash to buy houses, repair houses or build houses, buy cars, make business plans, and meet some other requirements The methods of lending to personal customerare installment loans, mortgage, lending by credit limits Loans term is flexible depends on the purpose of customer and the evaluation of the credit officers.Interest rates are determined based on interest rates of banks and selling interest rate

of SBV, or it may depend on the agreement of the customer and the bank Thecollaterals for loans include real estate (houses, land .), property (goods,machinery ), and the balance of deposit accounts, certificates of depositand other valuable assets

1.3 Lending activity for personal customer in commercial banks

1.3.1 The concept and characteristics of lending activity to personal customer

6 Concept of personal lending activity

If lending activity is classified by type of customer, this operation must beincluded loans to corporate, loans to financial institutions and loans for individualcustomers Lending for personal customer is a form of funding for the customers asindividuals It is the economic relationship in which the bank authorize the right touse funds to personal customer with a certain condition be agreed on the contract tomeet the purposes of the customer

7 Characteristics of personal lending activity

Lending to personal customer has specific characteristics which perform thedifferences in term of other types of loans as follows:

Borrowers: are individuals and households.

Loans size: most of the personal loans are small-scale but large on the

number of loans Lending personal customer meet all of the needs of individualsand families with a purpose of consumption or small making business Therefore,the size of a loan is relatively small compared with the assets of the bank However,the number of loans is quite large because of greater numbers individuals andhouseholds with varied demands

Loan purpose: To meet the needs of consumption or small business by

individuals and households Therefore, demand for loans depends on customer’spsychology and economic cycles of the borrower As the economy grow andstability, personal customer will have more positive attitude about the future, theyexpect to have more income in the future, therefore it will promote consumerspending at present Conversely, when the economy turns down people tend toreduce consumption, reduce investment in production and business, instead theywill increase savings and restrict to making loans from banks

Personal lending risk: lending to personal customer has a high level of risk.

It is considered as the most risky assets in the asset portfolio of bank People whoneed high risk personal loans are usually having a poor credit history However,they are obligatory to make payment of their unexpected expenses or debts Base onthe borrower’s current financial condition, bank can find out a high risk personalloan And there are many lenders who offer personal loan in high risk

Interest rates: Because of the small size of the loans (except for loans to

purchase real estate), the lending cost (include time, appraise process ) As well asthe risk of these loans is very high Therefore, interest rates of personal loans areusually higher than interest rates for other loans From the past to present, lending topersonal customer is considered as a relative high profitable item with rigid interestrates That means it is sufficient to offset the mobilizing cost of bank whereas mostother current loans’ interest rates vary with market conditions

Credit limit of personal loans: This is the maximum amount of cash

which banks lend to customers Credit limit is determined based on severalfactors such as capital needs of the customer, customer’s equity capital, the value

of collateral For the each type of loans, banks usually prescribe credit limits based

on collateral values or reasonable demand for borrowing Typically, mortgagelending has the highest limit For example, if customers pledge savings, bonds

or certificates of deposit, they may be granted a limit of 80% of the pledgedassets To determine the credit limit based on the collateral of customers,banks need to pricing property concretely and correctly

1.3.2 Loans Classification for personal customers

In order to make a better management in lending to personal customer, it isnecessary to classify loans for them There are several criteria to classify, they are:

8 Base on lending purpose

Based on the borrowing purposes, loans can be classified into threecategories for personal customer:

 For real estates:

This type of loan is for the purpose of construction, procurement or houserenovation by individuals and households This is a long time and large-scale loans

 For consumption:

It's the loans to improve daily life such as shopping facilities, utensils,tourism, education, entertainment This is small, short, lower risk loans forresidential purposes

 For household business

These are the loans to carry out the small business plan in every household,such as loans for trade, rental shops This is a short term loan The risk of this type

of loans is very high However, if banks manage the business of customers morefrequently, it will limit the risk

9 Base on repayment method

 Paid whole at maturity

This is a short-term loan by individuals and households which are meet theneed of cash from customer, and be paid once at the maturity The scale of loans isrelatively small A one-time loan is short term loan, and is used to pay for thevacation, buying household or car repairs The risk of this loan is not remarkable

A large-scale loan will get high risk This is because the characteristic oftype of loan is paid at maturity, payment sources primarily from the sale of otherassets or other sources

 Pay as installment

This is a short-term loans which to be paid at mid-term or two or moreconsecutive times (usually monthly or quarterly) The loan is paid by installments asagreement between banks and customers This method is used to finance purchases

of expensive items such as cars, home or to finance rental shops, shopping theother assets In general; the installment loan carries a fixed rate More than 80% ofthe total volume of consumer lending in commercial banks are made on the basis ofinstallment paid This comes from financial ability of customers that is not enough

to pay for a single loan, and the regular payment each month is more favorable

 Lending by credit card

Credit card and other international payment cards were quickly approved inbanking system Credit cards provide a regular flow of credit that customers can usewhenever they need Nowadays, because of the grateful help from technology,credit card holders can access to a large number of financial services includingsavings accounts and accounts payment and credit limit

10 Base on type of loans

 Indirect loans:

It is the form of lending in which the bank buys all the debts from enterpriseswhich have been sold on credit on subject goods, or have been provided services fortheir individual customer This form of lending is through the sale or servicesdepartment without direct contact with customers

There are some advantages of this type of lending Firstly, the banks easilyextended and increased loan sales Moreover, the banks will reduce the savings andloan costs In addition, this is a foundation to expand the relationships withcustomers and creates favorable conditions for other activities of the bank Last butnot least, if banks have a good relationship with the retail business, the indirectlending for individual customer is less risky than the direct lending form

However, these types of loans also have several limitations Firstly, incommercial bank, lending activity is not in direct contact with customers It throughsome enterprise that was credit on goods and services sold However, in theselection of customers, the selection criteria of the business enterprise are differentfrom commercial banks Secondly, in direct loan cause the lack of control of thebank through before, during and after the loan Third, technical and businessprocesses of these types of loans are too complex

 Direct loans

This is a type of loans in which the bank and customer meet directly toconduct lending or debt collection

This form has the following advantages Firstly, because the lending activity

is conducted directly between banks and customers, banks can use to thoroughlyqualifications, knowledge, experience, and skills of credit officers Therefore, theseloans often have substance higher than the amount of indirect lending through retailbusiness Secondly, form of direct lending is more flexible than forms of indirectlending This is because when bank and customer work directly, the relationshipbetween banks and customers will better that will satisfy benefit of both banks andcustomers Last but not least, direct loans to customers is very wide, so makingservices, new gadget is very convenient, and this type of lending can enhance andpromote the image of the bank to these eyes of customer

Beside these advantages above, some disadvantages of direct loans stillremain Firstly, the expansion and increasing loan sales are not favorable in theform of indirect lending to individual customer Moreover, it take more time andcost compared with indirect forms of lending, especially to large customers at thesame time will make more difficult for banks

11 Base on measurement of loans guarantee

 Loans with guaranteed asset

This is lending activity which guaranteed asset is real estate that formed fromcapital or assets owned by the customer before lending Guaranteed asset increasedsafety for the loan in the way that the bank could create pressure to force customerspay the debt In worst case the customer does not pay the debt, the sale of thesecurity properties also help reduce losses to the bank Lending collateral is furtherdivided into two types:

Type 1: Including owned property or long-term usage property of the

customer Forms of this type of guarantee can divide into two categories as follows:

The first category is mortgage lending This is a type of lending in whichcustomers must authorize collateral to the bank in the time of committee The list ofconditions and pledged the bank are based on the specific provisions and creditpolicies of each bank The pledged assets are generally assets in which banks cancontrol and preservation of relative certainty In addition, the holding of bank doesnot affect the operation of customers such as: valued papers, foreign currencies,gold…

The second category is collateral lending This is a form of lending in whichthe borrowers have to authorize all the documents of ownership or use of collateral

to the bank for holding in the time of commitment The mortgage assets typically isreal estate such as housing, land usage, or is the estate that the borrower stillneeds to use such as automobiles, motorcycles

Type 2: Loans secured by assets that formed from borrowed money When

customer demand for a loans but have no collateral or assets that do not meet theconditions of the bank, the bank may require customers to use assets formed fromfunding of bank as security To ensure customers do not sell assets, banks generallyrequire customers to commit to preserve the property; insurance in which bank isthe beneficiary

 Loans without guaranteed asset

This is based on unsecured credit (mortgage) from the third party Bankchooses customers who have a good ability to repay loans for lending Customersborrow money from bank in term of salary, mainly applies to customers with astable income Moreover, income from the business can be considered to use as asource of repayment This form is consistent with the small and short-term loans.

1.3.3. The process of lending to individual customers in commercial banks

The assessment of a personal loan is not simple because of the followingreasons First and foremost, information of customers is not complete Customerscan hide the financial situation, their health In addition; individuals andhouseholds cannot easily overcome financial problems In fact, the percentage ofloan that not repay from personal customer often much more than several timecompare with loans to enterprises or other financial institutions A key feature tohelp banks reduce losses from such loans is that the value of loans is relativelysmall and be secured by the mortgaged property which easier to sell in the market

The process of lending is applied for loans to lead the process takes place in

a scientific way, limit and prevent risks, and improve the quality of credit Here isthe lending process to individual customer in commercial bank:

Figure 1.1: Process of lending to individual customers in commercial banks

12 Application reception

The first step is application reception When customer has a demand for aloan, they went to the bank's staff and record the necessary information on loanapplication Loan officers will guide customers on file for the full loan andregulations in the form of banks which include loan application, loan options andrepayment plans, list of pledged assets mortgage and related documents, proof ofincome (if any), household registration, ID people and other related papers

13 Credit underwriting

This is the most important step in the any lending process Creditunderwriting determines the quality of loans, which often includes the followingcontent:

Firstly, credit officer have to ensure legal capacity and civil capacity, andfully legal for bank loans of borrowers If customer wants to borrow from banks,they have to fully answer questions from loan officers about the reasons for loans orcredit demand comes from Conversation between loan officers and customers isvery important because through that credit officers can identify conditionalcharacteristic as well as the purpose of customers If loan officers discovered thedishonesty of customers for loan, customer's loan application will be rejected.Usually, the basic characteristics of the borrower are exposed through the purpose

of the loan Credit officers ask customers about the purpose of loans to make surethat purpose is consistent with the lending policies of banks

Secondly, to evaluate the financial status and repayment capacity ofcustomers, credit officer have to identify customer's income, balance statement atbanks The identification of sources of stable monthly income of customers is veryimportant because this is the source of repayment to the bank Customers who havestable income and income remaining after deduction of living expenses often havehigh borrowing capacity For customers with low credit quality, banks are required

to stand guarantee for the repayment of loans If the borrower does not pay for the

debts are guaranteed, the person in charge is responsible to guarantee payment.However, many banks have only considered the guarantor is a guarantee ofpsychological rather than a real source guarantee Borrowers will find moreresponsible to repay the loan because the reputation of the sponsor

14 Collateral estimating

The third step is collateral estimating Credit officers need to check theownership or the lawful usage of property that used as security or guarantee.Valuation of collateral is also a very important stage in the evaluation stage Finally,banks should consider the possibility of preserving the assets of the borrower Aftervaluation process is complete, staff will set up a credit appraisal report whichsummarized the general situation, customers' names, loan purpose, loan amount,repayment plan If the loan must specify in the amount, term, interest rates,repayment options and the conditions attached to and submitted to the chief creditreview

15 Reviewing and signing the credit contract

After receiving the evaluation report and the loan application, manager ofcredit officer will review and requires additional explanations or modified if thereare deficiencies Then the report will be submitted to the council for considerationand approval of credit, or decide to decline In case of necessity (such as for largeloans), the council may request credit a reevaluation parts of borrowing records.After the loan application is approved, the bank and the customer will sign acontract to conduct credit

16 Disbursement and control while granting credit

After the credit contract has been signed and approval, the bank will disbursecapital to customers corresponding amount in the contract is signed In the process

of disbursement, the bank will conduct and supervise the usage of customer loanpurposes This process allows banks to collect information about customers, if the

information reflects the good direction that credit quality is guaranteed, by contrast,the loan quality is threatened

17 Closing or renew debts

This is the final step of the lending process to individual customer Creditofficers monitor and supervise the payment of the customer This process helps thebanks collect principal and interest and identify new customer needs Generally, thecredit repaid in full and on time is safe However, in some cases, these credits havenot been refunded or repaid fully and on time The debt is not paid on time is due tothe problems in the operation of the customer The examination is very importantfor banks to promptly make new decisions to ensure recovery of loans

When detecting the bad debts, but customers still insist to try to correct forrepayment, loan officers can consider rescheduling, add some new conditions such

as reduced interest or additional loans In case the customer deliberately fraudulentintentionally, delays to pay debt, the bank applied the liquidation plan, which isused to measure can be debt recovery, including frozen and sale of mortgagedproperty, deprivation of deposits

1.3.4 Development lending to personal customer

18 The concept of development loans for personal customers

Developing lending activity for a specific type of customer is process that thebank increases its usage of resources to enhance lending activity to such kindcustomers both in sales and loan quality (loan quality is interpreted as the recovery

of bank loans to customers) Accordingly, the expansion of lending to a customerthat is not only increase profits from lending to customers but also raise the prestigeand image of the bank in the mind of customer

Depending on the type of bank, resources and position of the bank that theywill prioritize the development of lending to a different customer However, at thistime when Vietnam's economy is developing at a rapid rate, the lending market is a

market in individual customer are "fertile", but only in its infancy, yet be exploited.

So now many banks are focusing their resources to expand lending to individualcustomer subjects

19 Evaluation indicators

There are many indicators reflecting the development of personal loans Theindicators include: the number of loans for individual customer loans, outstandingloans of individual customer, structure of outstanding loans, quality of personalloans , profits from lending to individual customer, the number of loan products forindividual customer

a Indicators reflecting the scale lending:

 The number of loans for individual customer:

This is an indicator to assess the actual lending growth results The number

of loans increased demonstrates the increasing of number of individual customer.This suggests banks to increasing market share of individual customer in the area oftheir activities and also reflect the attention of the market

 Outstanding loan of individual customer:

This is the most realistic criteria to assess the expanding of lending forindividual customer Outstanding loan increased proved personal lending activityhas achieved good results However, the results of developing personal lendingactivity only get really effective in the case that outstanding loan increased both inabsolute numbers, and relative number (ratio of outstanding loans to personalcustomer compared to total outstanding)

Another method to assess lending growth is that bank can be use criteria ratio

of outstanding loans of personal customer and total outstanding loan of bank

lending It is calculated by comparing consumer loans to total outstanding loans in

general the same time

This indicator shows the growth rate of personal loans compare with loans

growth rate of the whole bank The higher proportion, the larger scale Therefore,

personal lending will account for a higher position in the bank's activities

 The structure of outstanding loans to personal customer:

The structure of outstanding loans to personal customer compared with other

types of loans such as corporate lending, lending to credit institutions is also an

important indicator to assess the results of the development in personal lending in

commercial banks .When the proportion of outstanding loans for individual

customer increased while the proportion of different types of loans decreases, this is

a proof of well developing in personal lending activity of bank

b Indicators reflect to lending quality:

 Profit from personal lending activity:

This is an indicator to evaluate the results of personal lending development.

The biggest goal of the development in personal lending activity in commercial

banks is that increase profits for banks in the hardy competing condition The

increase in the amount of personal loans is considered to be effective if there is an

increasing profit in term of total loans sales Personal lending profit in current year

must be higher than previous years

= = x

Costs occur in personal lending activity include interest rate of capital tomeet demand for term loans, advertising costs, operating costs These costs areallocated in each period

An outstanding loan is the portion of the loan that has not been paid Aspayments are applied towards the loan balance, the amount outstanding decreases.The lower the interest rate, the faster the balance declines when payments are made.Interest rates impact significantly on revenue of personal lending activity Theinterest rate applied to loans and changes in each period based on the credit policies

of banks Interest rates depend on loan term The longer loan term, the higher theinterest rate is applied Bank have to face with risk and cost during lending activity,such as underwriting cost, administrative cost…Interest rate applied for personalloans have many kinds:

The interest rate base on the amount of money borrowed (add-on): Theinterest rate will be fixed from the beginning to the end of the loan term, and arebased on the original outstanding loans This kind of interest rates generally applies

to the mortgage loan repayment Total interest from this type of interest rates isoften higher than the interest that calculated according to the declining balance

Add on interest loan = Amount x add on interest loan x Number of months

R = I * (T + k) / 2T (Used to determine the interest rate add-on through theexpected interest rate)

I: Expected Interest rate

R: Add-on Interest

Lending revenue Lending interest

rates Outstanding loans

T: Time to maturity

k: The period to pay the principal / interest

+ Interest rate applied according to real outstanding loan It is adjustedperiodically based on the mobilized interest rate plus a certain margin, depending onthe credit policies of each bank

Because of these above characteristics of cost and risk, interest rates onpersonal loans are usually priced higher than corporate lending However, in fact,borrowers usually take an attention the money rather than interest rates charged forthe loan

 Overdue of personal loans:

The high quality personal loans are understood as the loans are repaid ontime both principal and interest to the bank There are many criteria to evaluate thequality of a loan, but the target is in common use today is overdue Overdue debt isamount of debt that is unpaid at the maturity The higher rate of overdue, the lowercredit quality is This is proof of non-effective in increasing loans scale

If rate of overdue is too high, the quality of lending activity of bank is low.Banks may have violated some basic principles when granting loans withoutanalyzing carefully ability of customer's payment, mortgage regulations, lack oftesting, strict control Another reason is that bank may violate the principles ofcredit risk diversification, just focus so much capital on a group of customer

If this rate is too low, it represents the closely principles of credit, riskdiversification, tight control of customer loans of that bank

Moderately level of overdue reflect the boldly business strategy of the bankwhich dare to take risks at a certain level to achieve a higher profits If bank canimplement this strategy, it means that bank has performed a high ability in credit

risk management Thus, to get high profits in lending activity, and limit risk,commercial banks have to control the rate of overdue at the acceptance level

20 Lending policies of banks

Lending policy of banks is a system of guidelines and regulations governinglending activities by the board of director It proposed to use funds for businesses,organizations, household’s families and individuals efficiently Lending policiesbecame a general guideline for credit officers and bank’s employees It increasespecialization in the analysis of lending, and create a general agreement to minimizerisks and improve profitability

All issues related to a loans funding will be considered and given in thelending policies of banks such as: customer objective, scope and lending limitation,

Overdue rate

Overdue loan

Outstanding loan

x 100%

loans procedure, interest rates, loan term, the guarantees and policies for issues ofproperty.

All of elements in lending policies are have a powerful impact to theexpansion of lending in general and personal lending activities in particular Bankcan expand personal lending activity only when it is an obvious target expansionwhich expressed as an orientation of lending policy On the other hand, when abank is available with the diversify type of personal loans; the expansion is alsoeasier and more convenient than banks with simple products

21 The financial capacity and financial management capabilities of banks

The financial capability of the bank is determined in term of factors such as:the size of equity, the ratio ROE, ROA, earnings growth rate over the years, theproportion of overdue loans in total When a bank have a large equity capital, highability to raise capital in the short term, a huge amount of liquidity property, this bankwill be considered as a power of finance It can invest in the portfolio investment thatthe bank towards, and personal lending activity will be developed On the contrary, abank with low financial capacity will not have enough capital to invest in theportfolio that the bank interest, so lending activity will be limited that lead to thelimitation of personal lending expansion Therefore, this is a factor that help bank’sexecutives consider when making decisions to expand or restrict lending, includingpersonal lending activities

22 The quantity and professionalism of credit officers

Credit officer is the person who directly involved in decision-making oflending to customers; therefore they’re the first image of the bank The largequantity of credit officer with ethics and good professional level is important factorthat create a positive impact on personal lending activities It will boost lendingactivity becomes quick, saving time, limit the risk, and make a good impression tocustomer Professional officer credits also contribute to increase competition for

products and services of general banking and personal lending activities inparticular.

23 Marketing activity of bank

Marketing concept is always and everywhere to reflect market-oriented,customer-centric, benefit for the purpose of the business philosophy In bankingarea, marketing activities is to introduce and promote the image as well as theservices that banks offer It is also an important activity to contribute to expandingpersonal lending activity If done well marketing, customers will be impressed withbanks and banking services in general, and science and technology lending activities

in particular Personal lending market is still potential in Vietnam because in a longperiod most of bank focuses mainly on lending to business customers Marketingactivities, on the one hand, must always adapt to market condition and environmental

to ensure the bank's ultimate goal

24 Network of bank

The number of branches and transaction offices reflect the size of a bank Tofacilitate communication between clients and banks, banks extend branches andtransaction offices in order to attract the interest of customers on banks The morebranches and transaction offices, the more favorable in the expansion of personallending activity is Branches and transaction offices located in residential quartercan easily meet the borrowing needs of customers, and closely catch customerinformation Therefore, the expanding network of branches and transaction officesare factors affecting the expansion of personal lending activity in commercial bank

1.4.2. Subjective factors

25 Factors from customers

Customer is the people who directly choose and make loan decisions.Therefore, the elements from customers themselves have a huge impact to the

scalability of personal lending activity When the size of customer’s demandincreases, banks have conditions to expand personal lending scale

 Capital needs of customers

Personal loans product in commercial bank are services product, so funddemand of customer is main factor to decide forms of lending Personal customer ofbank includes individuals and households with the demand of loans are very diversewhich from the consumer purpose to production and business purpose The problem

is that banks have to found quickly as soon as possible needs of customer at eachperiod Customers who have different career, family status or marital age will havedifferent funding demand For example, younger customers (from 20 to 30 yearsolds) are often dynamic and interested in credit card products for shopping oroutings…Thus, determining funding demand of customers will create favorableconditions for bank in personal lending activity

 The ability to meet loan’s collateral conditions

They are financial, income, moral, and collateral factors that meet loanconditions of banks to ensure the safety of loans Beside discover of the fundingdemand of customer, bank have to discover which demand have high liquidity Thedemand that is able to liquidity is understood as the needs of customers that therepayment in the future is guaranteed

In addition, customers who have high cultural level, the understanding of theloan will be responsible for the debts and have a sense for the bank debt Ifcustomers are people with good morals, have a sense of debt to the bank, pay ontime and completely, the loan risk is low, customers will get the trusty from banks,

so that banks will have opportunity to expand personal loans

There are also other factors such as family size, characteristics of customers,the ability to meet the customer's loan conditions such as security properties, theowner papers also affect to loan demand of customers

26 Factors from market conditions

We can understand this group factors are environmental factors on the bank'sactivities Environment of banks also cause a major impact on expanding lending tocustomers in general and for individual customers in particular It includeseconomic environment, legal environment, social environment, the development ofscience - technology and competitor

 Economic Environment

Bank is a financial intermediary institution that is most important to theeconomy Therefore, any fluctuations of the economy are affects to the lendingactivities of banks including personal lending activity

When the economy is stable and high growth, personal lending tends toincrease because of income and living standard of people is improved Conversely,when the economy falls into recession, instability leading to the future income ofthe consumers becomes unstable, people will choose to save rather than borrow.This will limit the expansion of personal lending activity

 Legal Environment

Banks are financial intermediaries that are holding a large volume of capitaland assets in the economy Therefore, all of banking activities are controlled strictlyunder the laws and authorities This not only ensures the safety of banks, but alsoensures customer transactions as well as the stability of the entire economy Eachcountry has different regulations on the banking activities as well as personallending activity If these regulations are tight, logical, no-frills and overlap, it willcreate a well conditions for the operation of general banking and lending activitiesand personal lending activity in particular

The system of documents, decisions, regulations have a great influence to thepersonal lending activities of commercial banks Stable legal system will improvepersonal lending activity It will boost lending facility and the capacity to provide