LV Thạc sỹ_Credit expansion to small and medium enterprises at Vietinbank hai ba trung branch

BACHELOR’S THESIS SOLUTION FOR CREDIT EXPANSION TO SMALL AND MEDIUM ENTERPRISES AT VIETINBANK HAI BA TRUNG BRANCH... HBT Hai Ba Trung Incombank Industrial and Commercial Bank of Vietnam

BACHELOR’S THESIS

SOLUTION FOR CREDIT EXPANSION TO SMALL AND MEDIUM ENTERPRISES AT VIETINBANK HAI BA TRUNG BRANCH

guidance and support from the initial to the final level enabled me to develop anunderstanding of the subject.

Moreover, I would also like to expose my great gratitude to Ms… – Creditofficer and General Department officers of VietinBank Hai Ba Trung branch for theirdedicated support and assistance during my internship

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

1.1.1 General concepts of SMEs 3

1.1.2 Typical characteristics of SMEs 6

1.1.3 Roles of SMEs in market economy 7

1.2 Credit operations to SMEs by commercial banks 8

1.2.1 Roles of credit operations to SMEs with SMEs 8

1.2.2 Roles of credit operations to SMEs with commercial banks 11

1.2.3 Loans classification to SMEs by commercial banks 12

1.3 Key issues on credit expansion to SMEs at commercial banks 13

1.3.1 General concepts of credit expansion to SMEs 13

1.3.2 The necessity of credit expansion to SMEs in current Vietnam economy 14

1.3.3 Assessment ratios 16

1.4 Factors affecting the credit expansion to SMEs 18

1.4.1 Internal factors 18

1.4.2 External factors 20

CHAPTER II: THE REALITY OF CREDIT EXPANSION TO SMES AT VIETINBANK HAI BA TRUNG BRANCH 22

2.1 An introduction to VietinBank Hai Ba Trung branch 22

2.1.1 History of establishment and development 22

2.1.2 Scope of business 24

2.1.3 Organizational structure 24

2.1.4 Business performance of VietinBank Hai Ba Trung branch 29

2.2 The performance of credit expansion to SMEs at VietinBank HBT 40

2.2.1 Number of SMEs customers 40

2.2.2 Total lending balance to SMEs 41

2.3.1 Achievement 47

2.3.2 Shortages and limitations 49

2.3.3 Possible causes 50

CHAPTER III: SOLUTIONS FOR CREDIT EXPANSION TO SMES AT VIETINBANK HAI BA TRUNG BRANCH 54

3.1 Key orientation of the future development of the VietinBank 54

3.1.1 Orientation of VietinBank and VietinBank Hai Ba Trung branch 54

3.1.2 The orientation for credit expansion to SMEs at VietinBank Hai Ba Trung 55

3.2 Solution for credit expansion to SMEs at VietinBank Hai Ba Trung 56

3.2.1 Understanding the SME Market 56

3.2.2 Finding new potential customers 56

3.2.3 Improving current products and designing new products that are specific for SMEs 57

3.2.4 Performing well the customer analysis 57

3.2.5 Improving risk management for lending to SMEs 58

3.2.6 Diversification collateral in lending to SMEs 59

3.2.7 Strengthen the consulting activities for SMEs 60

3.2.8 Improving raising capital from deposit activities 60

3.2.9 Building flexible lending interest rate for SMEs 60

3.3 Recommendation 60

3.3.1 Recommendation for government 60

3.3.2 Recommendation for State Bank of Vietnam 61

3.3.3 Recommendation for SMEs 62

CONCLUSION 64

HBT Hai Ba Trung

Incombank Industrial and Commercial Bank of Vietnam

SBV State Bank of Vietnam

VietinBank Vietnam Joint Stock Commercial Bank for Industry and Trade

SMEs Small and Medium Enterprises

Table 1.1: Classification of enterprises 4

Table 1.2: The Scoring table to classify the size of enterprise 4

Table 2.1: Result of deposit activities at VietinBank Hai Ba Trung 2009–2011 30

Table 2.2: Structure of total deposit by terms (2009–2011) 33

Table 2.3: Result of credit performances (2009 – 2011) 34

Table 2.4: Credit quality in VietinBank Hai Ba Trung (2009 – 2011) 36

Table 2.5: Collecting loans after settling risks (2009 – 2011) 37

Table 2.9: Lending balance to SMEs at VietinBank Hai Ba Trung 41

Table 2.10: Outstanding loans to SMEs at VietinBank Hai Ba Trung 43

Table 2.11: Bad debt ratio at VietinBank Hai Ba Trung 46

LIST OF DIAGRAMS Diagram 2.1: Organizational structure of VietinBank Hai Ba Trung 25

Diagram 2.2: Result of deposit activities at VietinBank Hai Ba Trung 2009–2011 30

Diagram 2.3: Structure of deposit by type of customer (2009–2011) 32

Diagram 2.4: Credit Growth Rate (2009 – 2011) 35

Diagram 2.5: Outstanding loan classification by term (2009 – 2011) 35

Diagram 2.6: Number of Card (2009 – 2011) 39

Diagram 2.7: Proportion of SMEs customers and Growth Rate (2009 – 2011) 41

Diagram 2.8: Lending balance to SMEs Growth Rate (2009 – 2011) 42

1 Rationale

Small and medium enterprises are central to economic development, particularly

in emerging markets In order for SMEs to grow and their positive impact on theeconomy to continue, they need access to financial services, which has historicallybeen severely constrained According to Vietnam Chamber of Commerce and Industry(VCCI), SMEs comprise 97% of all registered business in Vietnam, employapproximately 50% of the workforce, and contribute 40% for GDP; however, only 30%

of SMEs can access to bank loans Many SMEs often rely on informal sources ofcapital, such as from relatives, or even in unofficial market to meet their financialneeds But in many cases, these sources of capital cannot meet the capital need ofSMEs, and also have high cost, while commercial banks have been considered asteady, abundant and safe capital resource That’s why SMEs always look to bank loans

as the primary source for their financial needs Currently, SMEs still face a lot ofdifficulties in accessing to bank loans Commercial banks recognize that SMEs arepotential customers; create growth opportunities and competitive advantage However,commercial banks have traditionally viewed SMEs as a challenge because ofinformation asymmetry, lack of collateral, and the high cost of serving smallertransactions As the result, SMEs are largely underserved when it comes to basicfinancial services With such limited access to financing, SME owners struggle to makethe investments they need to increase productivity and competitiveness of theirbusiness, develop new markets, and hire more people Therefore, finding the solutionfor credit expansion to SMEs draws considerable attention

Interested in this concern, during two-month internship in Vietnam Joint StockCommercial Bank for Industry and Trade (VietinBank) Hai Ba Trung branch, I hadopportunity to learn and find out more about the credit operations for SMEs I foundthat the lending to SMEs has improved but profit from this activity still accounts for a

small proportion in total profit of branch Stemming from above reasons, I decided to

choose the topic “Solutions for credit expansion to small and medium enterprises at VietinBank Hai Ba Trung branch” for my thesis.

2 Research objectives

Through this thesis research, I aim to study the concepts of SMEs, the problems

on credit expansion to SMEs; and importantly, the situations of credit expansion toSMEs at VietinBank Hai Ba Trung branch over the past years, figure out the strengthand weakness The thesis also profoundly proposes any recommendations to expandcredit for SMEs in Hai Ba Trung branch

3 Research methodology

The thesis research is applied both primary data from interview with staffs andsecondary data from VietinBank Hai Ba Trung branch annual report, the Internet inorder to analyze, make comparison over the years Based on these, I can drawconclusions about situation of credit expansion in the branch and suggest somerecommendation

4 Research structure

Thesis research comprises of three main parts:

Chapter I: Theoretical background of credit expansion to SMEs at commercial banks.

Chapter II: The reality of credit expansion to SMEs at VietinBank Hai Ba Trung branch.

Chapter III: Solutions for credit expansion to small and medium enterprises

at VietinBank Hai Ba Trung branch.

CHAPTER I: THEORETICAL BACKGROUND OF CREDIT

EXPANSION TO SMEs AT COMMERCIAL BANK

1.1 Overview of SMEs in Vietnam

1.1.1 General concepts of SMEs

While there is general agreement that the SME market is significant in size andimportance, there is considerable variation in their definitions around the world

The major classification used by most countries to define SMEs is throughcapital and employment size However, the size ranges of their classification differ.Hence, what might be considered as “small” by developed countries will already fallinto the “medium” or “large” category for developing countries such as Vietnam Thus,cross compatibility with other countries for cross country comparison, is sometimesinappropriate or could not be used as basis for a policy recommendation Currently,Vietnam uses two criteria, capital and employment size to classify enterprises Thesecriteria have changed their number to assess SME in different periods to match witheconomic situation

In the past, small and medium enterprises were defined in the DocumentNo.681/CP-KTN dated June 20, 1998; and then were changed in the DecreeNo.90/2001/ND-CP dated November 23, 2001 Most recently, the definition of smalland medium enterprise was adjusted according to Article 3 of Decree No.56/2009/ND-

CP dated on June 30, 2009 on assistance to the development of SMEs Here is SME

definition: “Small and medium businesses that have business registration in accordance with law, is divided into three levels: micro, small and medium scale total capital (total capital equivalent to total assets is determined in the balance sheet of enterprises) or number of employees per year (total capital is the priority criteria), as follow:

Table 1.1: Classification of enterprises

Scale

Sector

Micro enterprises Small enterprises Medium enterprises Number of

labor

Total capital

Number of labor

Total capital

Number of labor Agriculture, forestry

and fishery ≤ 10 people

≤ 20billionVND

10 – 200people

20 – 100billionVND

200 – 300people

Industry and

construction ≤ 10 people

≤ 20billionVND

10 – 200people

20 – 100billionVND

200 – 300people

Commerce and service ≤ 10 people

≤ 10billionVND

10 – 50people

10 – 50billionVND

50 – 100people

(Source: Article 3 of Decree No.56/2009/ND-CP dated on June 30, 2009)

In commercial banks, they do not use the table above to classify enterprises.One method of classification enterprises that commonly uses in commercial banks inVietnam is using score to classify the size of enterprises

The size of enterprise was defined by four criteria: total capital, number ofemployees, net revenue, and payment for state budget, in which:

- Number of employees: is average number of employees that actually uses

in last three years

- Payment for state budget: includes taxes and other payments under stateregulation in financial year

You can see the scoring table to classify the size of enterprise that uses inVietinBank Vietnam as follow:

Table 1.2: The Scoring table to classify the size of enterprise

- From 40 to 50 billion VND 25

- From 30 to 40 billion VND 20

- From 20 to 30 billion VND 15

- From 10 to 20 billion VND 10

- Less than 10 billion VND 5

- From 1000 to 1500 employees 12

- From 500 to 1000 employees 9

- From 100 to 500 employees 6

- From 50 to 100 employees 3

- Less than 50 employees 1

- From 100 to 200 billion VND 30

- From 50 to 100 billion VND 20

- From 20 to 50 billion VND 10

- From 5 to 20 billion VND 5

- Less than 5 billion VND 2

(Source: Credit handbook of VietinBank Vietnam)

1.1.2 Typical characteristics of SMEs

Besides the common characteristics of enterprises, SMEs also have somespecific characteristics:

 Simplicity: The SME is a simple business structure, which allows the company

to be very flexible and makes necessary change quickly without such requirement asaddressing board members or stockholders for approval SME needs short reactiontimes to reply changing demand, trend in the market A bigger organization will needmore planning, more financial output, and their size becomes a handicap reducing their

flexibility This is a dominant advantage of SME With small and medium scale, SMEcan easily change its production or narrow down its size without causing any severeconsequences for society In addition, with simple business structure, SME gains thecross-functional communication and cooperation within the organization

 Small size: A small and medium enterprise does not require a huge amount of

capital, so SME can be easy to set up and operate, can work effectively with low fixcost To start a small and medium business, we just need low capital (but quickpayback), small business premise, and a small-scale factory Moreover, the small size

of the business can be an advantage when it comes to specialization and filling nichemarkets with products

However, small size can be a disadvantage when it comes to obtaining financingfor the business Many SMEs rely on personal assets of owners and management tofinance the company Due to low equity, limited financial capability, little collateral, nosponsor, and unreliable financial statement, the ability to borrow money of SMEs isvery limited Therefore, SMEs always lack of capital to finance investments even whenthey have opportunity Limited funds also affect marketing and the ability to reachnew markets with their products

 Depend on a small group of people: Many SMEs are quite small and have only

a very few employees who are relatives, friends with the owner This limited staff isrequired to complete all necessary tasks including innovation, production, marketing,sales and accounting for the entire business; for example, the owner of the businessmay also be the manager who oversees all the areas of the company Moreover, whencompany faces difficulties, because employees are relatives and friends so they canlower their salary, and have outstanding effort to overcome difficult time

However, this can be a disadvantage if employees do not have the required skillsets to perform multiple tasks well The owner may also the manager so he/she can lack

of experiences and knowledge Small group of people combining with small size of

SMEs, companies are less likely to attract talented and skillful people Humanresources are one of the most important factors for successful company, so huntingtalented, skillful employees is SMEs’ challenge

 Small and medium enterprises help to maintain free competition, limitmonopoly Unlike large enterprises which need protection from government, with largenumber of SMEs, they often do not have monopoly SMEs do not rely on the help ofgovernment; they are ready for opportunities to develop with high risk

Besides advantage from free competition, there are some drawbacks SMEshave to deal with small market, low competitiveness (partly because the monopoly oflarge enterprises)

 SMEs can promote potential of local area Large enterprises often meet

difficulty in using available materials in a local area due to their low volume, and arenot suitable for large production But SMEs have advantages in recruiting local labors,utilizing available local materials

1.1.3 Roles of SMEs in market economy

The SME sector is important to national economies because it contributessignificantly to employment and GDP, and because its growth is linked with theformalizing of an economy The most important role is that SMEs contribute to theeconomies in terms of output of goods and services The SME sector’s contribution toGDP confirms its economic importance In high-income countries, and some middle-income countries, the sector accounts for over half of national output In low-incomecountries too, SMEs play a sizable role In Vietnam, SMEs contribute 40% for GDP.Now in many growing economies of the world, there has been a deliberate emphasis onnurturing SMEs to a point where they can play a critical role in economic development

In many countries, the majority of jobs are provided by SMEs Currently inVietnam, SMEs comprise 97% of all registered business, and employ approximately2.7 billion labors They aid the creation of jobs at relatively low capital cost, especially

in a fast-growing service sector The benefit of SMEs to economy is that they develop apool of skilled and semi-skilled workers as a basis for future industrial expansion

There are a lot of other benefits that SMEs can offer to a country Experts havesaid that other benefits of small businesses to an economy are that they provide avehicle for reducing income disparities Many small and medium enterprises place atlocal area so they can solve the unemployment problem, especial in non-seasoningperiod, exploit local available materials, in order to develop local economy, reduce thegap among local areas, promote restructuring economy towards industrialization.SMEs are essentially the drivers of economic growth

Others include the fact that SMEs improve forward and backward linkagesbetween economically, socially and geographically diverse sectors of the economy, andoffer excellent breeding ground for entrepreneurial and managerial talents

1.2 Credit operations to SMEs by commercial banks

1.2.1 Roles of credit operations to SMEs with SMEs

Before learning about the roles of credit operations to SMEs with SMEsthemselves, I would like to introduce with you sources of fund for SMEs to have abetter overview at the importance of credit operations to SMEs by commercial banks

1.2.1.1 Sources of fund for SMEs

Here are some funding options for SMEs establishing and expanding business

It is unlikely that all the money will come from one source It will probably come fromseveral

 Issuance of bonds and shares of enterprises: Bond issuance is an effective

method of raising capital by enterprises, especially for countries with developedsecurities markets In Vietnam, this is not a popular tool for companies since the bondmarket is not full development It is hard for SMEs finding investors since investors

buy bond based on company’s reputation, credibility While unlike large enterpriseswhich have strong reputation, big capital, a lot of small and medium enterprises maynot qualified enough in these aspects and investors do not have enough informationabout companies It is similar to issue shares of enterprises since it is very costly andhard to trading in market With low capital, not many SMEs can afford to pay forinvestment bank to issue shares Moreover, investors are not fond of SMEs’ sharessince SMEs lack of reputation.

 Friends and relatives: Borrowing from your friends and family is a good way to

get money However, the big drawbacks of this source of fund are it is small amountand may not enough for financial need; it is usually short term loans since it is theirsaving money This is a limited source of fund, and only SMEs have strong financialbackground family can access

 Trade credit: Trade credit is an arrangement between businesses to buy goods

and services on account, means without paying cash immediately We called it accountpayable It is an inexpensive way of financing, creates flexibility in business activities.Furthermore, trade credit is mostly based on the confidence, close relationship betweenenterprises and partners The relationship may have to build for a long time, thus it can

be an obstacle for beginning enterprises In addition, it is also short term fund

 Finding investors: SMEs can find someone who is interested in their business

and offer them investment opportunities These people who have money and are

looking for an investment called “Angel” Angels contribute capital to your business in

return for partial ownership or debt repayment As such, the degree of control andterms under which you receive seed money for your business will depend on thearrangement made between you and your angel The key to finding an angel in yourarea is networking, and it can be challenge for SMEs

 Bank credit: It is the most important source for SMEs since bank credit is an

easy way to access compared to other methods Commercial bank can always provide

with different term of loans, with sufficient amount, conditions, scheduled paymentsare appropriate for each business In spite of some limitations as SMEs have to meetbank’s requirements, conditions, bank credit is still a preferred choice to access capitalwhen they need.

With such limited access to financing, SME owners struggle to make theinvestments they need to increase productivity and competitiveness of their business,develop new markets, and hire more people

1.2.1.2 Roles of credit operations to SMEs with SMEs

As analyzing above, I draw a conclusion about the importance roles of bankloans with SMEs

 Bank loans ensure the operation of SMEs’ business To survive and develop in

high competition of market economy, enterprises need to continuously improve theirtechnology, production, machinery and equipment However because of lacking capital

as a typical characteristic of SMEs, they do not have enough money to perform theseimprovements Bank loans will facilitate SMEs to buy equipment, sharp theircompetitive advantage and improve business performance In addition, globalization istrend for enterprises, small and medium businesses tend to seize opportunity to expandtheir business outside local area Opportunity is not waiting for anyone, so it will bewasted chance if enterprises do not have enough capital

 Bank loans help SMEs to enhance the efficiency of using capital When a SME

accesses to bank loans, it will has obligation to the commercial bank in payingprincipal and interest strictly in time, plus it is also forced under the supervision ofcommercial bank If enterprise cannot carry the payment or miss the time of payment,

it will be warned, punished with much higher payment, even involved in lawsuit Italso loses its credibility and will be difficult for borrow in the future Therefore,building a feasible projects, detail plans to use capital wisely in lending process makesure enterprises’ business perform well and can repay the loans

 Lending helps SMEs to achieve an optimal capital structure It means by

lending from commercial banks, enterprises can use leverage, a tool in finance to useborrowing capital to finance for company investment In fact, companies usually arefinanced partly with debt and partly with equity Enterprises will have to choose howmuch debt and equity to use for financing in order to achieve optimal point Thus,lending from commercial banks is a useful way for SMEs leverage On the other hand,SMEs have to be very careful when using leverage Although the advantage tofinancing with debt is the tax benefit, there is a cost of financing with debt, the costs offinancial distress including bankruptcy costs of debt and non-bankruptcy costs (forinstance: staff leaving, suppliers demanding disadvantageous payment terms,bondholder/stockholder infighting, etc) This is a trade-off for SMEs

1.2.2 Roles of credit operations to SMEs with commercial banks

Lending to SMEs has typical characteristics: small loans, often short term, butlarge number of SMEs These characteristics are challenge but also profitableopportunity for commercial banks

Because of the size of loans for SMEs is often small, the cost for commercialbanks is higher as the higher cost of serving smaller transactions However with largenumber of SMEs (97% of total registered businesses) and high development potential,financial service for SMEs is a potential market which will bring for commercial bankprofitable opportunity

Nowadays, commercial banks not only provide lending activities but also otherservices, such as international payment, L/C, etc…; so when borrow from banks, smalland medium enterprises will use these other services for their convenient, contributefor banks’ profit In Vietnam, for a long time, lending has been considered as a coreand dominant activity of commercial banks which imposes a critical impact on thesurvival and development of a bank, and contributes for 70 – 90% its profit Becausecredit can easily bring huge profit, banks just need to lend with higher interest rate than

saving interest rate, while other services have small profit margin, high cost Incontrast, in the world, the trend is profit based primarily on service activities Thistrend is sustainable development for commercial banks Currently in Vietnam, bankingindustry is facing a lot of difficulties (high interest rate, restricted growth target), so inorder to stand firmly, the market is shifting towards other financial services besidescredit operations Thus, commercial banks need to overcome challenges and capturethe opportunity offer by SME segment.

Equally important, lending for SMEs helps commercial banks to spread risk anddiversify customers If banks only concentrate on lending for large enterprises withlarge loans, bad things happen to them, banks may be trapped in trouble of getting lostthe loans Instead of this, by lending to SMEs with small loans for each and big inquantity, bank can diversify its risk

1.2.3 Loans classification to SMEs by commercial banks

 Base on term of loans:

o Short-term loans: are loans with maturities less than 12 months.Enterprises often use these loans to support for the lacking of working capital SMEsuse working capital to finance for short-term expenses

o Medium and long-term loans: Medium-term loans include loans withmaturities from 1-5 years Long-term loans are loans with maturities more than 5 years.SMEs use these loans to purchase fixed assets, such as plant, equipment, and invest inlong-term plans, for example expanding production However, medium and long-termloans have higher risk so in commercial banks, they only account for a smallproportion

 Based on security of loans:

o Secured loans: are the loans in which the borrowers pledge the assets asthe collateral for the loans or obtain the guarantee of a third party In case the

borrowers default, the banks can take possession of the assets and sell them, or obtainpayment from third party to regain some or entire amount of loans.

o Unsecured loans: A loan that is issued and supported only by theborrower's creditworthiness, rather than by some sort of collateral

1.3 Key issues on credit expansion to SMEs at commercial banks

1.3.1 General concepts of credit expansion to SMEs

Credit expansion to SMEs means commercial banks increase the number ofSMEs customers, increase the outstanding loans to SMEs and the loans proportion forSMEs Besides, commercial banks have to enhance credit risk management system toensure the credit quality Credit expansion to SMEs has to get along with safety byenhance the credit quality for these loans

Increasing the number of SMEs customers is the simplest way of creditexpansion Increasing quantity is not only finding new customers in new market, inother fields of production which banks have not pay attention before, but also payingattention to customers or partners of banks’ current customers

Credit expansion also shows at the increasing outstanding loans for SMEs.However if only based on this criteria to evaluate credit expansion is not accurate Wewill discuss more about this later

Besides, commercial banks use the proportion of loans to SMEs in totaloutstanding loans to evaluate the expansion The proportion does not show the absoluteamount of money lending to SMEs, but it can show the priority of banks to SMEscustomers

Finally expanding credit to SMEs will lead to increase the credit risk In spite ofcredit expansion purpose, commercial banks cannot lend to any enterprises even they

do not qualify the standard of loans Credit expansion has to go along with enhancecredit risk management, so the expansion will be only meaningful if commercial bankscan do well in both tasks

1.3.2 The necessity of credit expansion to SMEs in current Vietnam economy

I already mentioned the role of credit expansion to SMEs to commercial bank,SMEs and market economy in previous parts, so we can understand partly about thenecessity of expanding lending to SMEs In this part, I will not repeat all of them; I willfocus on the necessity of credit expansion in current state of Vietnamese economy

2011 was a very difficult year for all economy and as prediction of experts, 2012 willcontinue to be a tough year for Vietnamese economy; banking industry, enterprises arenot outside of that picture

In 2012, commercial bank is in a turbulent year: fierce competition amongcommercial banks, inflation is still high, high bad debt ratio, interest rate policy ischanging, classification commercial banks in group to decide the credit growth rate,etc… In this situation, commercial banks are very careful in credit expansion, especialcredit crunch for non-manufacturing sectors such as real estate, securities However,recently State Bank of Vietnam has gradually loosened the credit policy For instance:

in two consecutive months, State Banks has reduced the interest rate ceiling, from 14%

to 13 % in March 13, 2012 and from 13% to 12% in April 11, 2012 In addition, asstipulated in Circular No 14/2012/TT-NHNN from May 8, 2012, the State Bank ofVietnam (SBV) has imposed a 15 percent cap on lending interest rates for fourpreferential sectors (rural agriculture, exports, small and medium enterprises,development of supporting industries) Even though we do not know about the effects

of these changing, at least in some way it shows the government’s attempt to saveSMEs Government takes action to help enterprises overcome the crisis, and despite ofstill a lot of difficulties ahead, there are also few positive signs from commercial banks

as they are gradually expanding credit to enterprises by different ways, such as specialprogram for lending to enterprises

Expanding credit to SMEs is extremely necessary in current economy.According to Ministry of Planning and Investment, until the end of 2011, there are

more than 624,000 enterprises, and small and medium enterprises account for 93-97%.Only in first 9 months in 2011, the number of enterprises went bankruptcy is estimated

at 49,000 enterprises, while 40% SMEs have gone bankruptcy In addition, only in first

3 months in 2012, 12,000 enterprises have registered for bankruptcy All the statisticsring an alarm for SMEs’ health There are many reasons to explain especially ineconomic crisis today, and lack of capital is a popular reason for enterprises’ dead.Because in 2011 a lot of commercial banks also had problems with funding, liquidity,high lending interest rate (more than 18%/year), so lending is very difficult; SMEshave to borrow from unofficial market with very high interest rate (even 100%/year).Therefore, commercial banks expand credit to SMEs is extremely necessary to saveSMEs, and whole economy since SMEs are a key component of an economy

Furthermore, during this difficult time, if commercial banks do not lend toSMEs, they will lose a lot of potential customers which may become their traditionalcustomers in the future (when financial crisis is over) to others banks They can lose alarge profitable opportunities comes from SMEs as I mentioned in part 1.2.2, SMEs arelarge in quantity and they also use other banking financial services

1.3.3 Assessment ratios

In order to evaluate the credit expansion to SMEs, we use two indicators:quantitative indicators and qualitative indicators of lending activities

1.3.3.1 Quantitative indicators

 The number of SMEs customers of commercial bank

- The increasing number of SMEs customer:

M = M 2 – M 1

in which:

M: the increasing number of SMEs customers (absolute increase)

M 2 : the number of SMEs customers in period 2

M 1 : the number of SMEs customers in period 1

- SMEs customer growth rate (%)

SMEs customer growth rate (%) =

in which:

M: the increasing number of SMEs customers (absolute increase)

M 1 : the number of SMEs customers in period 1

- Proportion of SMEs customer:

Proportion of SMEs customer =

 Lending balance to SMEs of commercial bank

Lending balance to SMEs in a period is the actual total amount of money thatcommercial bank lend to SMEs in that period (The period can be daily, monthly,quarterly, yearly)

In different with lending balance, the collection loans in a period is the totalamount of loans commercial banks collect from SMEs in that period

The amount of collection loans is greater or equal to lending balance in the sameperiod show better ability of loans recovering

- The increasing of lending balance to SMEs:

The increasing of Lending Lending

lending balance to SMEs = balance to SMEs - balance to SMEs

(Absolute increase) in period 2 in period 1

- The lending balance to SMEs growth rate:

Lending balance to SMEs growth rate =

 Outstanding loans to SMEs of commercial bank

An outstanding loan is the portion of the loans that has not been paid It is theamount of lending to SMEs at a specific point Banks use outstanding loan to calculateinterest payment in each period, so it is a very important indicator.

Outstanding outstanding loans Lending amount of loans to SMEs = to SMEs + balance - collection loans

in period 2 in period 1 in period 2 in period 2

The increasing Outstanding loans Outstanding loans outstanding loans to SMEs = to SMEs - to SMEs

(Absolute increase) in period 2 in period 1

Outstanding loans to SMEs growth rate=

 Overdue debt to SMEs of commercial bank

Overdue debt ratio to SMEs is not direct criteria to evaluate the credit expansion

to SMEs of commercial banks, but it is an important criterion to evaluate quality of theexpansion Credit expansion must go along with safety, improving credit quality

Overdue debt ratio of SMEs (%) =

- Effectiveness of credit expansion to commercial bank, SMEs,environment

- The credit risk management policies of commercial banks.

1.4 Factors affecting the credit expansion to SMEs

1.4.1 Internal factors

 Business strategy of commercial bank

Business strategy guides for operation of all bank’s departments is going atconsistent direction If commercial bank’s target is SMEs, its activities will aim toperform well financial services which meet demand of SMEs

 Lending policy of commercial bank

Credit policy of commercial bank is a set of policy related to expand or limitcredit growth in order to achieve bank’s plan, limit risks The policy usually includesprovisions on customer policy, interest rate policy, loans term policy, credit structure,policy for overdue debt, solving debt problem, etc… Credit policy is principle thatdetermines credit expansion of commercial bank By expanding credit to SMEs, bankwill be flexible, diversified its credit policy to attract SMEs customers

One of basic content of credit policy is lending interest rate With commercialbank, lending interest rate is a double-edged knife If a bank lowers its interest rate,more SMEs customers will come to lend, outstanding loans will increase, but profitfrom lending activities may reduce If commercial bank raises its lending interest rate,

it may lose customers to other banks So, bank has to set a reasonable interest rate inorder to implement comprehensive credit expansion to SMEs With SMEs, lendinginterest rate policy of commercial bank has very important meaning, and directlyaffects their lending decision

 Lending process

The lending process is a sequence of steps that credit officers do when SMEsapply for borrowing money It started when enterprises apply for loans to the day loanscontract liquidated A reasonable, flexible lending process will enhance lending

activities and reduce risk for bank A good process will provide necessary informationabout credit-worthiness of customer, feasibility of the project In addition, a goodprocess is a simple procedure, makes convenient for customers This will influence alot in credit expansion to SMEs.

 The size of commercial banks and its capital structure

The size of commercial bank has direct influence to its ability to expand credit,especial bank’s equity Bank’s equity is determination of a bank’s lending limitation.The larger size of bank, the more it can meet the lending demand and meet the creditexpansion purpose

On the other hand, the capital structure is essential to expand lending to SMEs.Based on large, diversified of capital, commercial bank will have a stable foundation toexpand credit to SMEs In total capital of bank, capital from deposit activities playsimportant part, often accounts for more than 50% of total capital The size and thestructure of capital from deposit influence to bank’s credit activities Moreover, thesaving interest rate is one of the key to determine the lending interest rate Therefore,deposit policy of commercial bank is an important factor affect credit expansion

 Marketing strategy of commercial bank

Marketing has big effect to sell bank’s products, including lending Commercialbank has a good marketing plan means it does well in market research, building areasonable strategy, price, distribution for banking productions The result of goodmarketing is attracting more customers, creating difference in fierce competitionamong commercial banks today, and facilitating the credit expansion for SMEs

 Human resources

In any business, human resource is critical element for the development of thisbusiness Qualified staffs will help bank quickly grasp the changing in market,anticipate the potential risks, so they can give customer wise advices, bring to them

best products and build reputation for the bank Qualification of bank’s staffs is solidbasis for expanding credit, not only with SMEs but also with all bank’s activities.

1.4.2 External factors

 Political factor

A country with stable politic will facilitate for economic development In adeveloping economy, SMEs will tend to expand their productions, and demand forbank loans also increases At the same time, SMEs have better opportunities to achievegood business results, so their ability to carry the payment in time for bank alsoincreases

 Economic factor

Banking industry is always a sensitive business in a changeable marketeconomy A developing economy will create favorite conditions for the development ofboth commercial banks and SMEs When economy is in good condition, SMEsincrease borrowing to expand their business In contrast, when economy is goingdown, SMEs are forced to narrow their business; poor business performance leads todelay payment for bank loans; so commercial banks are also very cautious in lending toSMEs In summary, the economic environment is one of important factors determiningthe lending efficiency

 Law environment

Financial policies, monetary policies, regulations for commercial banks, all ofthem affect the banking credit activities Loosening or tightening monetary policieswill influence the credit expansion plan of bank Moreover, with a complete,synchronous legal system, commercial bank and SMEs can carry their business in asmooth way, make the expansion easier

 SMEs

SMEs are the most important external factor that affects the credit expansion.Because they are borrowers, so their status influences directly the lending decision ofcommercial banks If SMEs have good financial statement, low bad debt ratio, feasibleproject, banks are willing to lend However, SMEs are not often in such goodconditions, so commercial banks have to consider a lot before making decision

The biggest difficulty for SMEs in accessing bank loans is collateralrequirement Another reason commercial banks do not want to lend SMEs is that thefinancial capacity of SMEs is limited Commercial banks do not assess financialcapacity based on the charter capital; enterprise with small capital does not mean it haslimit financial capacity However, the problem is that the debt ratio of SMEs is too highcompared to their equity A lot of SMEs have total debt equal their total asset, evenseveral times their equity It explains why commercial banks do not trust when lend toSMEs

Besides, these factors also affect the credit expansion to SMEs: the capacity ofusing capital of SMEs is low; the corporate governance has not been adequateattention; the projects are not feasible; and enterprises’ financial statement is nottransparent

CHAPTER II: THE REALITY OF CREDIT EXPANSION TO

SMEs AT VIETINBANK HAI BA TRUNG BRANCH

2.1 An introduction to VietinBank Hai Ba Trung branch

2.1.1 History of establishment and development

2.1.1.1 History of VietinBank

On March 26th, 1988 Vietnam Joint Stock Commercial Bank for Industry and

Trade – VietinBank (formerly Industrial and Commercial Bank of Vietnam –

Incombank) was established upon the separation from the State Bank of Vietnam

under Decree No 53/HDBT of the Council of Ministers Now, VietinBank is one of the

four largest State-owned commercial banks of Vietnam, its total assets account for over

20 percent of the market share of the whole Vietnamese banking system

On April 15th, 2008 Industrial and Commercial Bank of Vietnam changed its

trade name from Incombank to the new trade name VietinBank The adoption of the

new brand name “VietinBank” was a milestone for the radical transformation ofVietinBank, a milestone in the integration process to the world economy andsustainable development into a diversified financial group keeping leading position inVietnam On July 31st, 2008 VietinBank received “ISO 9001-2000 Certificate”

As a result of great efforts during the 4 years’ equitization preparation process,

on 25th December 2008, VietinBank successfully offered 53,600,000 shares to investorswith the average successful bidding price of 20,265 VND per share (compared to thestarting price of 20,000 VND) In the context of unfavorable declining of securitiesmarket, the Bank’s IPO was considered as a typical event of Vietnam securities market

in 2008 Following the successful IPO, on July 16th, 2009 VietinBank was listed on HoChi Minh Stock Exchange (HOSE) as CTG On October 11, 2009, VietinBank wasranked the second in the Top 20 leading listed companies in Vietnam

July 8th, 2009 under license for establishment and operation No 142/GP-NHNN,issued by the Governor of State Bank of Vietnam on July 3, 2009, Vietnam Bank forIndustry and Trade was renamed as Vietnam Joint Stock Commercial Bank for Industryand Trade Throughout more than 50 years of development, VietinBank has developed

an operations network comprising:

- 01 Transaction Centers, 149 branches, 527 transaction offices, 166 savingsoffices

- 02 Representative offices

- 04 independent accounting subsidiaries: VietinBank Leasing Company;VietinBank Securities Company, Ltd.; VietinBank Asset Management Company;VietinBank Insurance Company

- 03 administrative units: VietinBank Information Technology Center; VietinBankCard Center; VietinBank Training Center.

Although the economy experienced various difficulties in recent years,VietinBank has successfully achieved its business plan The powerful potentialities aswell as the ceaseless attempts of its whole staffs has been acknowledge and rewarded.VietinBank is the first Vietnamese banks to be certified ISO 9001:2000 The vision ofVietinbank is become modern, efficient leading domestic and international finance andbanking corporation

2.1.1.2 History of VietinBank Hai Ba Trung branch

VietinBank Hai Ba Trung is a branch of VietinBank, located at 285 Tran KhatChan street, Hai Ba Trung district, Hanoi city Under the Decree No 53/HDBT of theCouncil of Ministers, the organizational structure of State Bank of Vietnam switched to

a new structure, two-tier banks, from a branch of State Bank and a branch of economicbanking at district level of Hai Ba Trung area, which are directly under the State Bank

in Hanoi, changed to IncomBank Hanoi of IncomBank Vietnam Under the Decision93/NHCT-TCCB dated April 1st 1993, IncomBank Vietnam rearranged itsorganizational structure in Hanoi on the management model two-tier banks ofIncomBank Vietnam, left out the city level, two branches at region I and region II Hai

Ba Trung are branches under IncomBank Vietnam From September 1st 1993, under theDecision of General Director of IncomBank Vietnam, there is only one IncomBankbranch at Hai Ba Trung district since the merging of IncomBank branch at region I andregion II Hai Ba Trung On March 22nd, 2007, under the Decision No.107/QĐ-HĐQT-NHCT1of Board of Directors NHCT1, IncomBank branch – region II Hai Ba Trungwas renamed IncomBank Hai Ba Trung branch On August 5th, 2009, under theDecision 420/QĐ-HĐQT-NHCT1, IncomBank Hai Ba Trung branch becameVietinBank Hai Ba Trung branch

Up to now, VietinBank Hai Ba Trung branch has overcome difficulties andaffirmed its position and important role in VietinBank system With the high growthand stable rate, VietinBank Hai Ba Trung branch has been rewarded as “Branch withexcellent business performance” in four consecutive years.

2.1.2 Scope of business

VietinBank provides wholesale and retail banking services both domesticallyand internationally, lending and investment, trade finance, guarantees and counter-guarantees, foreign exchange, deposits, payment, money transfer, domestic andinternational credit card issuance and payment, travelers’ checks, securities trading,insurance and leasing and other banking and financial services

BOARD OF DIRECTOR

Consumer BankingDepartment

ComputerizedInformationDepartment

SMEs BankingDepartment

Transaction OfficeCho Hom

General

Department

Transaction OfficeVinh Hoang

Cash & Vault

Management

Department

Saving Fund No.45 and No.50Tier 2- Transaction

Offices

(Source: VietinBank Hai Ba Trung General Department)

The followings are to go into details about important units in VietinBank Hai Ba Trungorganizational structure shown on Diagram 1.1

Corporate Banking Department:

 Trading with customers who are corporations to raise fund in both VNDand foreign currency

 Implementing marketing, selling, supporting, and consulting for corporatecustomers about VietinBank’s products and services

 Expanding and building long term relationship with strategic customers

 Implementing works that related to credit tasks and processing credit

transactions base on the strategies of VietinBank (for instance: conducting financial

appraisal for customer, investment project; making recommendation to approve/rejectthe request for credit; monitoring during and after the credits are granted; managingbad debt category 2, etc …)

 Updating and analyzing business performance, financial ability ofcustomers

 Carrying out trade finance for corporate, for example: export L/C, importL/C

 Recommendations to improve the current products and services

SMEs Banking Department: tasks and functions of this department are the same as

Corporate Banking Department However, the target customer of this department issmall and medium enterprise, not large corporation

Consumer Banking Department:

 Trading with individual customers to raise fund in both VND and foreigncurrency

 Carrying out transactions in fund mobilizing with individual customers

 Implementing marketing, selling, supporting, and consulting for individualcustomers about VietinBank’s products and services

 Expanding and building long term relationship with strategic customers

 Implementing works that related to credit tasks and processing credit

transactions base on the strategies of VietinBank (for instance: conducting financial

appraisal for customer, investment project; making recommendation to approve/rejectthe request for credit; monitoring during and after the credits are granted; managingbad debt, etc …)

 Updating and analyzing business performance, financial ability ofcustomers

 Coordinating with card center to implement card and e-banking business

 Recommendations to improve the current products and services

Cash and Vault Management Department:

 Maintaining the liquidity of business (this is the main function of thisdepartment)

 Collecting cash and making payment in authorized activities for savingfunds, transaction offices

 Coordinating with Accounting Department and Office AdministrationDepartment in order to transfer money between fund of branch and State Bank,between VietinBank Vietnam branches, saving funds, transaction offices, ATM(lending and borrowing in the inter-bank market).

 Providing quick finance to VietinBank when it needs money

Accounting Transaction Department:

 Implementing transaction directly with customers, for example:opening/closing account; depositing/withdrawing from account; foreign exchangetransactions, transferring VND, foreign currency; overdraft, discounting valuablepapers; calculating and collecting interest expense, etc…

 Controlling all transactions and accounts

 Giving suggestions to BOD to make plans, analyze current operation

 Making annual report for the branch

General Department: Now the General Department is formed from the merging of

Risk Management Department and General Department

 Proposing business plan, analyzing finance situation, and evaluatingannual report about business performance of VietinBank Hai Ba Trung branch (alsoincluding appraisement loans, risk assessment, credit rating, recommendation to collectbad debt category 3, 4, 5.)

 Making monthly report about branch’s activities

 Studying the expansion and development business network for branch

Office Administration Department:

 Implementing organization, recruiting and training staffs at the branchaccording to the policies and regulations of State and VietinBank

 Complying with regulation of State and VietinBank about salary, bonuses,social insurance, and personal income tax policies

 Coordinating with Accounting Department in order to make planpurchasing equipments, machines, stationery for branch

Card service center and E-banking Department:

 Issuing card for branch.

 Conduct market research, marketing to customers

 Installing machines, troubleshooting ATM card, and dealing with customer

Tier 1-Transaction Office:

 Receiving deposit of organizations, institutions, individual customers;raising capital from population

 Performing certain types of credit in VND and foreign currency within themandate of the Branch Director

 Implementing banking services including money transferring, foreignexchange, and so on

2.1.4 Business performance of VietinBank Hai Ba Trung branch

In three recent years, Vietnamese economy and the banking sector had beensuffered from a lot of difficulties and challenges with the going up and down of marketeconomy In 2008 and the first half of 2009, the country’s economy was facingnumerous difficulties and challenges as a consequence of global crisis We had to copewith many problems such as reduced growth rate, increased inflation, import surplus,unstable securities and real estate markets, difficult production and business activities,

so in 2008 Vietnam’s economic growth remained at only 6.2 percent after high growth

of over 8 percent in 3 consecutive years The banking system also saw unprecedentedmovements when the changing of monetary policy, the adjustment of interest rate Inthe second half of 2009 and 2010, the economy did not fully recover but the GDPincreased slightly in 2010 to 6.78 percent In 2011, the world economy has faced newchallenges with extremely hot issues: the European debt crisis, the slow growth rate ofAmerica The markets are volatile and also nervous because the level of uncertainty hasincreased A lot of people are afraid that the episode in 2008 will repeat in the nearfuture At the same time, the banking system is meeting new difficulties about liquidity,fierce competition among banks in Vietnam, etc…However with the determination andeffort of the Board of Directors and all employees, VietinBank Hai Ba Trung branch