LV Thạc sỹ_Lending actvities and lending quality for SMES in ACB Bank thang long

CHAPTER 3: THEORETICAL FRAMEWORK ABOUT LENDING ACTIVITIES AND LENDING QUALITY FOR SMES IN COMMERCIAL BANKS 14 1.. CHAPTER 4: EVALUATION ON LENDING QUALITY FOR SMES AT ACB THANG LONG BRAN

From 27/02/2011 to 06/05/2011, it was my great experience to have theopportunity taking internship period at Credit Department under ACB … transactionoffice This 10 week-period provides me a precious time to research as well as learnmore about banking activities

In the process of writing, I wish to give special thank to PhD … Hue for giving

me numerous great and valuable advices Moreover, thanks to considerable enthusiasmand generous support which I received from staff at ACB Trung Van transaction officewhich assists me a lot to do this thesis

Lastly, I offer my regards and blessings to all of those who supported me in anyrespect during the completion of the project

TABLE OF CONTENTS

ACKNOWLEDGEMENTS TABLE OF CONTENTS ABBREVIATION LIST OF TABLES LIST OF FIGURES I CHAPTER 1: LITERATURE REVIEW 7 II CHAPTER 2: RESEARCH METHODOLOGY 12 III CHAPTER 3: THEORETICAL FRAMEWORK ABOUT LENDING ACTIVITIES AND LENDING QUALITY FOR SMES IN COMMERCIAL BANKS 14 1 Commercial banks and SMEs 14

1.1 Commercial bank 14

1.2 SMEs and its characteristics 15

1.2.1 SMEs definition 15

1.2.2 SMEs’ characteristics 17

2 Lending activities and lending quality for SMEs 18

2.1 Lending definition and lending to SMEs’ Classification 18

2.1.1 Lending definitions 18

2.1.2 Loan for SMEs’ Classification 19

2.2 Lending quality 21

2.2.1 Lending quality definition 21

2.2.2 Criteria for evaluating lending quality 22

2.2.3 Factors affecting lending quality 25

IV CHAPTER 4: EVALUATION ON LENDING QUALITY FOR SMES AT ACB THANG LONG BRANCH 26 1 ACB Thang Long Branch’s overview 26

1.1 History and development 26

1.2 Current business performance 28

1.2.1 Capital mobilization 28

1.2.2 Lending activities 30

1.2.3 General business result 32

2 Evaluating lending quality for SMEs at ACB Thang Long branch 33

2.1 The importance of lending for SMEs 33

2.2 Structure of outstanding loan for SMEs 33

2.3 Lending quality for SMEs 35

2.3.1 Situation 35

2.3.2 Achievement 37

2.3.3 Limitations 39

2.3.4 Causes 40

V CHAPTER 5: RECOMMENDATIONS AND SUGGESTIONS TO ENHANCE LENDING QUALITY FOR SMES AT ACB THANG LONG BRANCH 44 1 Suggestions to ACB Thang Long branch 44

2 Suggestions to SMEs 47

3 Recommendation to Authority 50 COMMENTS

ACB: Asia Commercial Joint- Stock Bank

ACCA: Association of Chartered Certificated Accountants in VietnamCIC: Credit Information Center

M&A: Mergers and Acquisitions

SBV: State Bank of Vietnam

SMEs: Small and Medium enterprises

TOs: Transaction offices

VCCI: Vietnam Chamber of Commerce and Industry

LIST OF TABLES

Table 3.1: Scales of enterprises ACB’s regulation 16

Table 3.2: SMEs’ characteristics 17

Table 3.3: Loan for SMEs’ Classification 19

Table 3.4: Debt classification 23

Table 3.5: Qualitative criteria for evaluating lending quality 24

Table 3.6: Factors affecting lending quality 25

Table 4.1: ACB’s main competitors 26

Table 4.2: ABC Thang Long branch’s total outstanding loan structure 30

Table 4.3: Pretax profit at ACB Thang Long branch 32

Table 4.4: The importance of lending for SMEs at ACB Thang Long branch 33

Table 4.5: ACB Thang Long branch's Debt classification 36

LIST OF CHARTS

Chart 2.1: Methodology process 12

Chart 4.1: ACB Thang Long branch’s total mobilized capital 28

Chart 4.2: Structure of total mobilized capital based on term of loan 29

Chart 4.3: Structure of outstanding loan for SMEs based on term of loan 33

Chart 4.4: Total outstanding loan for SMEs from 2009 to 2011 35

Chart 4.5: Debts for SMEs’ classification 37

Chart 4.6: Bad debt ratio comparison 38

I CHAPTER 1: LITERATURE REVIEW

At the present time, there are nearly 500,000 SMEs, accounted for 90% of totalenterprises in Vietnam Thus it is the important part that generates almost 50% GDP foreconomy as a whole However, until now, almost those SMEs found very hard inaccessing to bank capital or loan According to Vu Tien Loc, President of Vietnam

Chamber of Commerce and Industry (VCCI), conditions to make loan was one of the

hard barriers for SMEs’ development Almost SMEs who has enough conditions to

borrow from banks are big and reputational ones The other, however, are denied to

access Besides, high interest rate results in moderated operation of SMEs (Nguyen Ba

An, Vice director of the Institution of Strategic Development, Ministry of Planning andInvestment) The fact remains that lending quality is one of the most important factorthat determines whether banks should continue lend out to SMEs or not To have

deeper understanding in this field, this thesis is aim to address the topic: “Enhancing lending quality for SMEs in ACB Thang Long branch” Based on practical situation

in ACB Thang Long branch, it would thus convey more realistic and specific figureand factors

First and foremost, theoretical framework will show some distinctions betweenthe SBV regulation and definition in some aspects and that of ACB For instance,according to Article 3, Decree No 56/2009/NĐ-CP of Government, SMEs is classifiedbased on total capital and number of staff By comparison, ACB provides much conciseand suitable work which is based on industry and net revenue of enterprises There ismounting evidence that such classification will be used much efficiently and correctly

to evaluate scale of enterprises, hence support ACB to provide most suitable creditpolicy to customers

It is believed that SMEs have particular characteristics that are significantlydifferent compared to other types of enterprises Dagmar Recklies (October 2011)

suggested that they typically displays range of features, such as: be dynamic and

flexible, having simple and effective organizational structure and low initial capital

investment but fast payback capacity, close relationship with customers and dependence on a number of limited number of people Meanwhile, it appears to impose some limitations, for instance: low completion capacity because of low position in market and small financial resource, difficult to adapt corporate culture to new situations and challenges…

So what are the criteria for evaluating lending quality? According to Nguyen

Tung Linh (2001), there were two types of indicators for evaluating lending quality,

namely: qualitative indicators and quantitative indicators For the former categories,

the amount of total outstanding loan to SMEs, diversification of loan and procedure tomake loan were mentioned For the latter one, it is overdue debt ratio, bad debt ratio,and provision for loan loss Moreover, Le Thi Hai Giang (2011) has added severalother indicators to be more suitable For example, lending quality must be compliancewith regulations, principles and process for credit, providing customers’ satisfactionand partially supporting to the growth of society and economy as the qualitativepointers Last but not least, profitability is obvious critical factor that should be concernwhen talking about lending quality since the good business must make profits

Furthermore, there is a wide range of aspects effecting to lending quality, too

Nguyen Tung Linh (2001) divided those factors into three categories, namely: factors

from SMEs enterprises, from commercial bank and other objective factors In each

category, a wide range of issue was mentioned, including financial capacity of thebusiness from SMEs, credit policy and internal control from commercial bank, naturaldisaster from other objective factors and so on This thesis, however, has takendifferent approach by classify into two classes, that is objective factors and subjectivefactors, thus, to some extent, for the sake of clarity

Going into the most significant part of this thesis, ACB Thang Long branch’lending quality for SMEs would be carefully analyzed, comparing and contrasting withother researches in order to find both similarities and differences

In 31/08/2010, Fitch downgraded ACB Vietnam’s crediting rating from D to D/E 1and it was due to the strong credit growth that placing high pressure into liquidity ofbank It is said that during the first half of 2010, credit growth in ACB was at 42%while the annual target was 54% Thus, this rate was too high for ACB, which wasconsiderably higher than other Vietnamese commercial banks In addition, CAR ratiodecreased from 12.4% at the middle of 2008 to only 9% at the middle of 2010 Despitebad debt ratio in ACB in 2010 was mere 0.37% but it no longer reflected the true storybecause of loosen Vietnamese accounting system To sum up, this event seemed to bealarming to ACB in general and its credit rating or lending quality in particular in 2010.

According to Investor newspaper, by the end of 2011, in spite of strictly

controlling, ACB leadership had to concede that credit quality of ACB is lower than that at the beginning of the year Bad debt continued to be the major threat to both ACB and banking system in Vietnam at the moment 2 To deal with this situation, ACB

said that it would concentrate all source to supply for retail sectors, individualcustomers and especially to SMEs Thus, somehow, SMEs is one of the targetcustomers who might bring better image and profits for ACB’ business

More than that, another study in “Enhancing credit quality at ACB Tien Giang

Branch3” has provided the writer numerous useful information about other branches ofACB It reveals that ACB Tien Giang achieved some good result in lending qualityduring 2010 and 2011 The most obvious achievement was diversification whichsatisfies the need of different types of customers Furthermore, total loan outstandinggradually increased over this period of time Other attainments also were mentioned,such as: revenue from credit activities were always higher over time, process of debtcollection was focused thus bad debt ratio decline from years to years, professionalstaff effectively worked and create good relationship with customers On the otherhand, the thesis also admitted some drawbacks in ACB Tien Giang branch, including:

1 http://vietstock.vn/ChannelID/757/Tin-tuc/164978-vcbnbspvanbspacb-bi-ha-muc-tin-nhiem-xuong-de.aspx

2 http://taichinh.vnexpress.net/tin-tuc/song-tai-chinh/2012/03/nha-bang-lon-cung-ngan-no-xau-7209/

3 tien-giang.1182832.html

http://tailieu.vn/xem-tai-lieu/tieu-luan-giai-phap-nang-cao-chat-luong-tin-dung-tai-ngan-hang-acb-chi-nhanh-loans to customers almost were small and concentrate too much on state owncompanies but not non-state companies, information for evaluating customers wereunderprovided thus resulted in slow procedure in credit rating Admittedly, comparing

to that of ACB Thang Long branch, there are both similarities and differences.However, there are still some limitations under previous thesis More specifically, somecritical ratios such as classification of debt or bad debt ratios were not mentioned.Sometimes, it went out of topic when talking about L/C and accounting Learning fromthesis about ACB Tien Giang, this thesis is going to be the first one addressing thelending quality’s situation in ACB Thang Long branch More than that, SMEs, onemain sector of customers, is going to be focused to give the best view about theinfluence of this segment into ACB Thang Long’s lending performance, finding its ownachievement as well as drawbacks in order to give the cause of the situation

All in all, some recommendations and suggestions will be given for ACB ThangLong branch lending management The prior number of measures has been mentions in

a lot of meeting and researches to address these concerns And whenever possible,solutions should come from all involved dimensions including ACB Thang Longbranch, SMEs, and the Government or SBV

From the vision of commercial bank, customized product is what SMEs expect.Mr.Amit Arora, Retail sales department director of Vietnam Standard Chartered Bank,

said “Formerly, banks usually supply the same products to all SMEs However, SMEs

demand more customized products or services Banks could support by cooperating with professionals to give best advices to SMEs’ need” Hence, it would be for long

term benefits rather than short term ones

Regarding SMEs, Nguyen Ngoc Ly, director of International KnowledgeDevelopment Company, has commented on the regime of family or friend control inthose companies It means that almost SMEs established by family members or group

of friends, individual so it effected a great deal to SMEs activities Coherent strategyand mission to grow is hence, inevitable necessary to survivals of SMEs Similarly,

Doc Le Dang Doanh strongly confirmed that “A change in economic condition will

require the change in business management Don’t consider difficulty in current business as unfortunate thing but the great opportunity to develop for enterprises Let’s innovate and beyond yourself”

When it comes to recommendation to the Authority or the Government, onegreatly daring but considerable opinion was represented by Doc Nguyen Thi Son(2012).Her proposal is to tackle with interest rate fluctuation by setting ceiling interestrate for mobilizing activities at 5% rather than 13% at his time So, interest rate forlending will fluctuate from 6% to 8% depends on term of loans A reasonable interestrate in lending certainly not only helps SMEs to have better source of capital to doingbusiness but also enhances lending quality at banks Furthermore, the State should have

some solutions to help enterprises to overcome difficulties such as: Improving business

environment, reducing personal and corporate income taxes; opening more chances for private enterprises, SMEs to participate in public’s investment projects, supporting businesses to improve technology and creating job retention (Economic expert Mrs.

Pham Lan Chi)

So, by referring to numerous extensive researches, this thesis, the 1st thesis whichinvestigates in ACB Thang Long’s lending quality for SMEs, denotes to thosefollowing main research questions:

1 What is lending and lending quality? What is the difference between lendingquality issues in Vietnam in general and ACB as particular? What are criteriaaffecting to lending quality for SMEs?

2 What is ACB and ACB Thang Long branch? How is it operations and financialperformance?

3 Any aspects of ACB Thang Long branch that implies positive or negativelending quality’s performance? What are the reasons?

4 How to improve lending quality in ACB Thang Long branch?

II CHAPTER 2: RESEARCH METHODOLOGY

Due to the need for the study to demonstrate understanding of factors relating tothe lending quality at commercial bank as well as the practical situation at ACB ThangLong branch, the research methodology is utilized to find data In detail, there are bothprimary and secondary resources used in this thesis To clearly demonstrate thismethodology, it is better to look at the process of finding as following:

Chart 2.1: Methodology process

The bar chart provides information about the research methodology process underthe thesis As is seen, there are seven successive steps from choosing topic to writingreport Under each steps, one or more methodology was taken to sufficiently supplyneeded data as well as information

More specifically, choosing topic is the first step as well as probably the mostcritical part in the thesis Among a variety of topics or subjects in banking field, thewriter needs to careful considered which topic is interested and best suitable tosituation Through secondary resource including previous topics from other students aswell as learning base from already classes joining, she decided to select “Lendingquality” theme in order to have deeper research

Next, theoretical framework proves to be absolutely necessary to go in thefollowing step The secondary sources again seem to hold critical position Text bookssuch as “Bank Management and Financial Services” by Peter S Rose and Sylvia C

Hudgins provides reader a great deal of knowledge in this field Moreover, she alsolooked for several websites to gain more fundamental material for studying Throughthis part, the definition about commercial bank and Small and Medium enterprises wasclearly showed There were also policies and requirement of Government under thelending procedure Compare and Contrast methodology was frequently applied at thistime, considering the difference between the Authority statement and customizedtheories using in Asia Commercial Bank.

Before carrying on the questions or hypothesis under the thesis topic, doinglibrary research and online research was taken There seems to be evidence that theywas extremely valuable source where the reader had chance to read lots of other thesis,learning from their works and understand which should be done in her own thesis Thismeans that those thesis supplied literature review for readers Advanced program NEUlibrary and National library were immense places which she frequently came to findthose secondary data

The longest part is performing internship at ACB Trung Van transaction officeunder ACB Thang Long branch It is the fact that this thesis could not be done if lack

of this experience time Not only secondary data from ACB Thang Long internalreports or written policies under this branch but also other primary data were provided

in this period She was given opportunity to meet many officers under ACB, askingquestions and observing daily performances Thus, primary data was mainly observedthrough this 10 week period of internship

Last but not least, analyzing data is critical before going to writing thesis In here,quantity analysis methodology was utilized Based on banking and economic theory,practical experiment together with logic thinking, writer identified the problems,described it and gave comment

All in all, several research methodologies were flexibly used in the thesis.Nevertheless, due to the limited in resource and time, it might be still lack of some

deeper methodology Thus, it would be great pleasure to receive comment andsuggestions from readers.

III CHAPTER 3: THEORETICAL FRAMEWORK ABOUT LENDING ACTIVITIES AND LENDING QUALITY FOR

SMES IN COMMERCIAL BANKS

1. Commercial banks and SMEs

1.1 Commercial bank

It is the fact that bank is one of the most significant financial operations ineconomy It includes many types to support the economical development Amongthem, commercial bank takes the biggest proportion as well as critical function It issaid that Bank is the big treasurer for whole society It not only assists a great deal tothe state, enterprise but also effect to single individual in the country To enterprise,Bank provides credit or loan in order to buy inventories, adding working capital,purchasing facility and investing in business activities To the Government, Bank,without doubt, is effective channel to achieve economical stability Thus, the role ofbank is undeniable and it should to take a great care to its activities, ensuring the strongand steady lives for every citizens

Thus, what is exactly commercial bank? There are several ways to define themeaning of bank To be short, it is financial institution yielding a variety of financialservices, especially credit; saving and payment services could be considered as bank Itthen does the most financial functions than any business operations in economy.Understanding the importance of banking activities, Law on Credit Institutions of the

Social Republic of Vietnam No 07 in 1997 recorded: "Banking activity, which is the

activity of the currency business and banking services, its regular content is to receive deposits and use this money for credit activities and payment services ".

1.2 SMEs and its characteristics

1.2.1 SMEs definition

According to Article 3, Decree No 56/2009/NĐ-CP of Government, the

definition of SMEs was stated as: “Small and medium enterprise is the business that

has business registration in accordance with law It could divide into 3 levels: micro, small and medium scales depending on total capital and annually average number of employees So, enterprises that have below 10 employees are concluded as the micro enterprise, from 10 to 200 people are small enterprises and from 200 to 300 are medium ones.”

It is the fact that in accordance with this definition, total capital is the prioritycriteria in order to determine the scale of enterprise Nevertheless, this is theunsuitability in classification The reason is that total capital is one calculated by totalequity and total mobilizing capital Among those, capital from equity is fairly stablewhile that from mobilizing capital obviously always fluctuates Thus, total capital ofenterprise no doubt will be change due to that Consequently, one enterprises which isclassified as the small enterprise today can become the medium enterprise tomorrow.The classification is aim to the appropriate support for enterprises but it is shown thatthose can be modified pretty easily at this time

Understanding that problem, Asia Commercial Bank has its own criteria to decidewhich one is SMEs

As is illustrated by the table, all types of industries are represented and it is basedfrom net revenue of enterprise in classifying the business scales rather than the totalcapital There is every likelihood that those categories will be used much moreefficiently and correctly to evaluate scale of enterprises, hence support ACB to providemost suitable credit policy to customers

Table 3.1: Scales of enterprises ACB’s regulation

1 Agriculture and forest < 25 VND billion 25 ≤ X ≤ 400

VND billion

2 Garment production and leather clothing

3 Health educational services business

4 Advertising series, counseling, monitoring and

printing business

5 Production of office equipment, appliances,

educational and medical equipment

6 Accommodation, dining and entertainment

services business

7 Warehouse business and transport support

8 Construction

1 Producing, processing, and operating food,

beverage and livestock feed businesses

< 50 billion 50 ≤ X ≤ 400

2 Producing medicines business

3 Commercial products trade

4 Agriculture and forestry trade

5 Transportation business

6 Mechanics and equipment manufacturing

7 Wood manufacturing, producing wood products

and other forest products

8 Sea food processing

9 Real estate and infrastructure business

10 Fertilizes, basic chemicals and synthetic rubber

resin productions

11 Metal and metal products productions

1 Electronic, optical computers and

telecommunications equipment productions

2 Transportation and airline business

3 Mining

4 Steel production business

5 Building material productions

6 Producing, distributing power, energy and

telecommunications services business

Source: ACB internal document

1.2.2 SMEs’ characteristics

It goes without saying that SMEs have its own special characteristics need createboth pros and cons

Table 3.2: SMEs’ characteristics

Dependence on a limited

number of people (often

owners and managers are one

and the same persons)

·Long-term thinking, perspectives

·High commitment

Static thinking, limited to the experiences and the knowledge of the owner(s)

· Difficulties to adapt corporate culture to new situations and challenges

· Potential conflicts between corporate objectives and personal objectives of the owner

·Ability and willingness

· In many cases not suitable for the complex planning and implementing of international activities

· Low willingness to introduce more sophisticated structures

Small size ·Basis for specialization,

often successful with niche strategies

Limited resources (in terms of financial means and manpower):

· Limited funds to finance investments and initial operating losses for new activates

· Spending for market research

and market entry take a much higher proportion of total spending in SMEs than in larger businesses

· Limited number of staff to take

on additional tasks

· Lack of internationally experienced employees

(Source: Dagmar Recklies, 2001 Small and Medium- Sized Enterprises and Globalization)

2. Lending activities and lending quality for SMEs

2.1 Lending definition and lending to SMEs’ Classification

Credit Institutions)

Credit is huge field in financial activities In fact, there are several sub-kinds ofcredit, namely: Lending, Discount, Guarantee, and others Among them, lending isconsidered as the most important part effecting to banking performance

In Decision 1627/2001/NHNN dated 31/12/2001, SBV also demonstrated that

“Lending is the form of credit, whereby credit institution gives the customers money to use for specific purpose and repayment of principle and interest in agreed period.”

Lending period is calculated from the time which is customers begin receiving theloan to the time of full payment of principle and interest that are agreed in creditagreement between credit institution and borrowers

Similarly, at ACB, lending is clearly defined as: “One form of credit which ACB

bank gives customers amount of money to use in specific purpose in stated time according to both sides’ agreement in principle of original loan and interest payment”

The fact remains that lending activities has gained in popularity Till now, lendingroles are pervasive and effects to almost segments of society It is a vital point toprovide capital for businesses to expand their production and business, and at the sametime improve business performance Next, it holds an active role to push the process ofaccumulation and concentration of capital for the production activities Last but notleast, it is evident that bank lending is one of effective tool to regulate moneycirculation which is to harmonize macro-economics

2.1.2 Loan for SMEs’ Classification

When it comes to lending activities, there are numerous ways to classify to suitwith demand of customers Similarly, loan aiming to SMEs objectives also has fullrange of types, effectively serve any requirement Up to now, there are six main basesthat can be used to sort loan, including: Based on term, based on collaterals, based oncustomer’s categories and some other sources Hence, this part mainly gives readersbasis knowledge about loan classification as following:

Table 3.3: Loan for SMEs’ Classification

1 Based on

term

Short-termloan

Loan with term under 12months

X ≤ 12 months

Medium-termloan

Usually over 1 year to 5years

12 months < X ≤ 60months

Long-termloan Term over 5 years X ≥ 60 months

2 Based on the

origin of

credit

Direct lending The bank directly finances for borrowers and then

borrowers directly pay back to the bankIndirect

lending

Lending through intermediary organizations

3 Based on

collateral

Secured loan The borrower pledges some asset (e.g a car or property)

as collateral for the loan, which then becomes a secureddebt owed to the bank In the event that the borrowerdefaults, the bank takes possession of the asset used ascollateral and may sell it to regain some or all of amountoriginally lent to the borrower

Unsecuredloan A loan that is issued and supported only by theborrower's creditworthiness, rather than by some sort of

collateral Generally, a borrower must have a high creditrating to receive an unsecured loan

4 Based on

purpose of

borrowing

Real estateloan

Loan are secured by real property- land, building, andother structures and include short term loans forconstruction and land development and longer termloans to finance the purchase of apartments, homes,commercial structures and foreign properties

Agricultureloan

Loan extended to farms and ranches to assist planningand harvesting crops and supporting the feeding andcares of livestock

Financialinstitutionloan

Include credit to banks, insurance companies, financecompanies and other financial institution

Commercialand industrialloan

Loans are granted to businesses to cover purchasinginventories, paying taxes and meeting payroll

Where the lender buys equipments or vehicles and leasethem to its customers

5 Based on

interest

payment

Fixed interestrate

Loan in which the interest rate charged on the loan willremain fixed for that loan's entire term, no matter whatmarket interest rates do

Variableinterest rate A loan in which the interest rate charged on theoutstanding balance varies as market interest rates

change

6 Others Overdraft

lending A lending activity in which bank allows the borrower towithdrawal from bank account exceed the available

balance to a certain limit and for a period of time, which

is called overdraft limitInstallment

loan

An installment loan is a loan that is repaid over timewith a set number of scheduled payments Installmentloans are normally used for medium and long-termloans, financing for fixed assets or durable goods Eachpayment is negotiated consistent with repaymentcapacity of borrower

(Source: ACB internal source- issued together with Decision No 164/NVQD-KDN.05 dated 07/07/2005 by Chairman of Board of Management ACB)

To summary, it can be seen that Bank nowadays has a wide range of loanclassification that all together creates a flexibility and convenience to both lenders andborrowers It assists bank a lot to control its credit risk and then improve lendingquality

2.2 Lending quality

2.2.1 Lending quality definition

Lending quality can be explained as the ability to repay interest and principle in atimely manner or a measure of likelihood of default Applying responsible standardsensures lenders and borrowers’ success throughout the entire life of loan Also, efforts

to strengthen the lending process and maintain a strong quality control program is keyelements of responsible lending and critical for the strong credit finance system

More specifically, lending quality at commercial bank is how the loan iseffectively and appropriately used It must create larger amount of money through thatbank collect both principle and interest On the other hand, enterprises have ability topay debt in the right term, recovering expenses and making profits Hence, it meansthat banks have created both economic benefits and social effectiveness

“It is a general indicator that reflects capacity to meet the economic needed capital, the level of adaptation of banks to the external environment, illustrating bank strength in cut- throat competition to survive and develop.” 1

It goes without saying that lending quality is extremely important to manyobjects It commences with economic development being enhanced Guaranteedlending quality would ensure to increase lending capital turnover, which means thatwith the same amount of money, greater number of transaction could be made,facilitating money in circulation, and then strengthening purchasing power of money

1 http://docs.4share.vn/docs/13104/Nang_cao_chat_luong_cho_vay_cua_Ngan_hang_VPBank_Phong_Giao_Dic h_Hai_Ba_Trung_Ha_Noi_.html

Additionally, there is some evidence that good lending quality partly controlsinflation, creates monetary stability, and enhances national prestige.

More importantly, the existence and development of banks appeared to decide bylending quality By reducing business costs, management costs, the cost due toirrecoverable loan, lending quality raise bank’s profitability and competitiveness

2.2.2 Criteria for evaluating lending quality

2.2.2.1 Qualitative indicators

Before going to most significant indicators for evaluating lending quality belong

to quantitative criteria, it should be look at some main qualitative indicators

a Compliance with regulations, principles and processes for credit

Lending to SMEs should be compliance with the policies and regulations of theGovernment to ensure its safety level and the stability of the macro economy Whenconducting policy under the bank itself, it must compliance with all thoserequirements, avoiding any conflicts and ensuring the bank profitability

b Diversification of loan:

With the wide range of loan forms, it will lower the risk to banks Enterprises orcustomers also enjoy better choices

c Procedures to make loans:

Procedure should be simple, clear but still effective and convenient to customers

In other words, meeting timely capital for customers’ requirement is evaluated as goodsignal to the high quality of lending

d The level of satisfaction of customers (SMEs)

The quality of lending to SMEs is considered as good as it timely and fully meetsthe borrowing needs with reasonable costs Enhancing services quality is alsoinevitable to make customers happy at the end of the day, creating the difference fromother banks

2.2.2.2 Quantitative indicators

Under ACB, it is all clearly stated in the official Dispatch Reference: No 368dated 21/06/07 and CV SDBS No 453dated 453 06/02/08 on loan classification andprovisioning as following:

Restructured loan:

 Borrowers could not pay original debt and/or interest rate within the term which

is set in credit agreement, ACB evaluates that customers have ability to pay loan

or solvency in the following period: Adjustment to payment period for original

loan and/or interest rate.

 Borrowers could not pay original debt and/or interest rate within the term which

is set in credit agreement, ACB evaluates that customers have ability to repay

loan within a certain time after the loan term: Extending loan with suitable time

for customers’ source of debt payment

Table 3.4: Debt classification

loan loss Group 1: Standard

- Overdue from 10 days to 90 days

- The 1st time adjusted payment period debts

- Debts overdue from 181 to 360 days

- The 1st time restructured payment period debtsoverdue less than 90 days

- The 2nd time restructured payment period debts

50%

- The 1st time restructured payment debts overduemore than 90 days

- The 2nd time restructuring payment debt isoverdue

- The 3rd time restructured payment period debt

100%

(Source: ACB internal documents)

Then, basing from debt classification and other background knowledge,following is the table of quantitative criteria for evaluating lending quality

Table 3.5: Qualitative criteria for evaluating lending quality

SMEs

The size of proving loan ofbank to SMEs sector that need

in certain time, often yearly

The rise in thescale of loan sales

to SMEs needs to

be followed by theincrease inamount of debtrecovery with thelatter having atleast equal growthrate with theformer to ensure

development oflending activity

The larger loanscale to SMEs inparticular and to allcustomers ingeneral means thehigher the growth

of lending, thus thebetter operation oflending activities

debt ratio

Overdue debt: debts that

customers do not pay on timeand not meet bank or ACBapproval for the restructuring

of the repayment period So, itincludes debts categorized ingroups 2, 3, 4, and 5

Overdue debt ratiounder 3% isconsidered

acceptable

The lower overduedebt for SMEsmeans the betterlending quality forthis type ofcustomers

ratio

Bad debt covers all the debts

belonging three finalcategories of debts from group

3 to group 5

It should be lessthan 5% to havebetter lendingquality

The lower the ratio

is, the higher thelending quality forSMEs is, and viceversa When theseindicators are high,loan could be atrisk that threatensthe existence of thebank

groups Highprovision reflectsgreater potentialloss to be offsetand riskier loanportfolio.

-The pretax profit and after taxprofit of banks

Revenue is one thatneeds to considercarefully at the end

of the day Generalspeaking, thehigher the better

2.2.3 Factors affecting lending quality

There is every likelihood that both internal and external factors affect lendingquality In this part, several reasons are going to display to have better understandingabout lending quality and thus find the suitable explanations for its situations in ACBThang Long branch in the latter part of this thesis

Table 3.6: Factors affecting lending quality

a From SMEs Financial

capacity of thebusiness

Financial capacity will affect the outcome ofproduction and business activities, thus influent toability to pay debt of SMEs on right term

Management ofenterprises

Leaders of SMEs will partly leads to the business’performance of the enterprises

Business ethics It should avoid moral hazard Borrowers need to use

the loan properly and create profits in the right ways

commercial

bank

Credit policy Credit policy should be consistent with the State’ s

policy to develop economics but still ensure theeffective operation under bank itself

Lendingprocedure With suitable organization structure, it could carry onthe work effectively, meeting the requirement of

customers on the right time and in a way ensure thelending quality

Quality ofpersonnel

Staff is the most human factors in banks thus criticalgives rise to banks reputations as well as theeffectiveness of doing business

Internal control A team of professional, honest and responsible

employees is strictly required

The economic environment Economic conditions could negatively and positively

influent to operation of both SMEs and banksThe regulatory environments Legal framework in banking activities, especially in

lending is very strict and effect directly to banks andSMEs Complete and suitable legal frameworkswould provide the perfect environment in doingbusiness

Natural disasters Business can be totally destroyed when natural

disasters happen, devastating ruin all efforts andability to pay debt of enterprises

IV CHAPTER 4: EVALUATION ON LENDING QUALITY FOR

SMES AT ACB THANG LONG BRANCH

1 ACB Thang Long Branch’s overview

1.1 History and development

ACB: Asia Commercial Bank

Headquarter: 442 Nguyen Thi Minh Khai, 3th District, Ho Chi Minh City

Tel: (848) 3929 0999, Website: acb.com.vn,

Table 4.1: ACB’s main competitors

(Source: ACB’s internal document)