LV Thạc sỹ_Imporving short term loan quality at Agribank north hanoi branch

Solutions to improve the short-term loan quality at Agribank North Hanoi branch ...34 3.2.1.. After analyzing actualbusiness of Agribank North Hanoi branch, I have found out that one of

Topic:

IMPROVING SHORT – TERM LOAN QUALITY

AT AGRIBANK NORTH HANOI BRANCH Bachelor of Business Administration in English (E-BBA) Thesis

TABLE OF CONTENTS

ACKNOWLEDGEMENT

EXECUTIVE SUMMARY 1

LIST OF TABLE 3

LIST OF FIGURES 4

INTRODUCTION 5

1 Rationale 5

2 Research objective 5

3 Research methodology 5

4 Research subject and scope 6

5 Thesis structure 6

CHAPTER I: OVERVIEW OF SHORT – TERM LOAN OF COMMERCIAL BANKS 7

1.1 Definition and basic activities of commercial bank 7

1.1.1 Definition 7

1.1.2 Basic activities of commercial banks 7

1.2 Short-term credit activity 9

1.2.1 Short-term fund and demand for short-term fund of companies 9

1.2.2 Feature of short-term loan 9

1.2.3 Forms of short-term loan 10

1.2.4 Short-term loan procedure 13

1.3 Short-term loan quality 14

1.3.1 Criteria to evaluate short-term loan quality 14

1.3.2 Factors that affect quality of short-term loan 17

CHAPTER II: ACTUAL CREDIT PERFORMANCE ON AGRIBANK NORTH HANOI BRANCH 19

2.1 An overview Agribank 19

2.2 Agribank North Hanoi branch 21

2.3 Comment about short-term loan activity at Agribank North Hanoi branch: 30

2.3.1 Achievements 30

2.3.2 Weaknesses and reasons: 31

CHAPTER III: SOLUTIONS TO IMPROVE THE SHORT – TERM LOAN

QUALITY AT AGRIBANK NORTH HANOI BRANCH 33

3.1 Orientation of Agribank North Hanoi about credit activity and increasing credit quality: 33

3.1.1 Orientation of Agribank North Hanoi about credit activity 33

3.1.2 Orientation of Agribank North Hanoi about increasing credit quality 33

3.2 Solutions to improve the short-term loan quality at Agribank North Hanoi branch 34

3.2.1 Diversify short-term loan 34

3.2.2 Increase quality of collecting information process and analyzing process: 34

3.2.3 Restructuring outstanding loan: 35

3.2.4 Lending 35

3.2.5 Debt recovering 36

3.2.6 Increase quality of service and employee training 36

3.3 Recommendations 36

3.3.1 Recommendations for Agribank North Hanoi branch: 36

3.3.2 Recommendations for State Bank of Vietnam 38

3.3.3 Recommendations for customer: 38

CONCLUSION 39

REFERENCES 40

First, I want to express my thanks to the faculty members of the EBBAprogram at the Business School of National Economics University, the place thathave given me valuable knowledge to complete 4 years of university

Especially, I would like to thank my supervisor Mrs Le Thi Bich Ngoc, Ph.D.Her guidance and recommendation has helped me a lot in finishing this thesis Withher instruction, I have completed my thesis more

Last but not least, I want to thank all my family members include my 1 yearold nephew, for helping and encouraging me for 22 years

EXECUTIVE SUMMARY

In recent years, the worldwide baking industry has been sour and Vietnam’s

is not an exception The bad results of long-term and mid-term loan has startedreflecting in the financial report which cause high bad debt rate for many banks, thebad debt rate in the banking industry is 8.6% to 10% of total outstanding loan whichequal to 2.5 – 2.8 million billion VND As a result, bad debt rate of banks has been

a hot topic of society and concerned by many people Agribank has also metdifficulties in last year when their bad debt rate was 3.8% - 3.9% Therefore creditactivity of banks has met more challenges and their duty is raising credit quality

This research will give a theoretical overview of commercial banks andevaluate real situation of Agribank North Hanoi branch Based on this evaluation, Iwill identify strengths and weaknesses of credit activity After analyzing actualbusiness of Agribank North Hanoi branch, I have found out that one of theirweaknesses is short-term loan quality In 2010, the bad debt rate was only 2.39%which is below 3% and accepted by State Bank of Vietnam However, short-termloan bad debt accounted for more than 70% of total bad debt and it is a hot issuethat the branch has to solve immediately Based on the causes that the research hasfound out, I will suggest some solutions to improve the short-term loan quality ofAgribank North Hanoi branch

To analyze the actual credit performance of Agribank North Hanoi branch, Iwill base on their financial report in 2 years 2009, 2010, some standards in thebanking industry and other sources of information

The research is aimed to complete following objectives:

- Reviewing theoretical background on commercial banks and their business

or product as well

- Analyzing current performance of credit activity of Agribank North Hanoibranch to find out their problems

- Identifying the reasons and causes for their problems

- Giving some solutions and recommendations to solve the problem

My research has found out some key weaknesses of Agribank North Hanoibranch:

- Low short-term loan quality

- Not effective credit procedure

Based on the research findings, the solutions for weak points that Imentioned above are:

- Diversify short-term loan

- Restructuring outstanding loan

- Increase quality of staff training

- Adjust the credit procedure to make it more effective and convenient forcustomer

LIST OF TABLE

Table 1: Business result of Agribank North Hanoi branch 24

Table 2: Outstanding loan of Agribank North Hanoi branch 26

Table 3: Outstanding loan divined into economic sectors 27

Table 4: Bad debt of Agribank North Hanoi branch 28

Table 5.Credit cycle of short-term loan (Source: Agribank North Hanoi branch) 29

LIST OF FIGURES

Figure 1.Credit line for whole period 11

Figure 2.Credit line for the end of period 12

Figure 3.Factors that affect quality of short-term loan 17

Figure 4.Organization of Agribank North Hanoi branch 21

Figure 5.Credit activity based on duration of loan 27

1 Rationale

Credit is the most basic and most profit activity of commercial banks Nowadays, whenthe relationship between commercial banks and firms is tighter, the commercial bankssystem provides a huge amount of fund to firms Through credit activity, commercialbanks also play an important role in supplying fund to the economy, boosting thedevelopment of the economy Because of the important role of credit activity,increasing the quality of credit activity is a necessity with every commercial bank,especially in the current competitive market of Vietnam

In recent years, Agribank North Hanoi branch has continuously expanded creditactivity and received some remarkable achievments The branch is situtated in BaDinh province with many companies and big, potential firms which have highdemand in funding and continuously increasing This is favorable condition forAgribank North Hanoi branch to expand credit acitivity and increase profit.However, Agribank North Hanoi branch has met some problems with short-termloans for example: procedure or marketing activity,etc the urgent demands isfinding solutions to solve this problem Therefore, I decide to research on this

problem and my topic for the graduation is: ” Imporving short-term loan quality at

Agribank North Hanoi branch ”

* Evaluate short-term loan activity at Agribank North Hanoi branch

* Giving solution, recommendation to improve short-term loan quality of the branch

Other sources of secondary data includes: magazine, newspaper, Internet and otherrelevant document

4 Research subject and scope

Research subject: outstanding loan and credit activity

Range of research: from 2009-2011

Due to some limitations, the research is lack of some information that AgribankNorth Hanoi branch can not public

5 Thesis structure

Apart from Cover pages, Table of Contents, Abbreviation, List of figures, List oftables, Acknowledgements, Executive summary, References and Appendixes, thebody of the thesis is divided into 3 chapters as follows:

 Chapter 1: Overview of short-term loan of commercial banks

 Chapter 2: Agribank North Hanoi branch

 Chapter 3: Solutions to improve the short-term loan quality at AgribankNorth Hanoi branch

CHAPTER I: OVERVIEW OF SHORT – TERM LOAN

to provide credit and make payment operations and other related operations

Commercial banks are financial intermediate, the bridge between surplus units anddeficit units It transfers unused money of surplus units to deficit units who needmoney to operate business, manufacture or consume Banks mobilize unused capital

in the economy through receiving deposit or borrowing and they use those unusedcapital to serve spending needs or business capital needs Credit fund of banks hasfacilitated reproducing process in industry, agriculture, commerce and increases therate of reproducing process From providing credit activity, banks have boostedinvestment, play an important role in developing the economy and improving livingstandard

1.1.2 Basic activities of commercial banks

 Mobilizing capital

In order to have enough fund for lending, commercial banks have to find a way tomobilize capital One of important sources is the deposit of individuals ororganization Beside that, commercial banks also have other sources such as issuingloans, borrowing from other credit organization or borrowing State Bank ofVietnam (SBV) Banks will pay interest for customer ’s deposit, its loan and commit

to pay on due date

When a commercial bank receive more deposit, the reserve increase exactly thesame amount, when customers withdraw their deposit, the reserve decrease exactlythe same amount

Credit activity

As we know, the main business field of commercial banks is financial and currencyfields Credit is the most important activity, bring the highest profit and cover the

expense for operating cost such as: reserve cost, deposit cost, business cost, riskmanagement cost or tax Commercial banks have many different credit product toserve the needs of customers However, we can divide it into some basic products:

 Discount valuable notes:

Valuable notes is created mainly from trading products and services on creditbetween customers The seller can keep the valuable notes to ask for money frombuyer on maturity date or bring to the bank to ask for discount berfore maturitydate When the customer bring the valuable notes to commercial banks to ask fordiscount, the commercial banks will keep the valuable notes and give the customer

an amount of money which is calculated based on interest rate on the valuablenotes Beside that, commercial banks can receive the fee for discounting valuablenotes The commerial banks can wait until maturity date to receive the money orrediscount at the State Bank of Vietnam in case they have liquidity need

 Lending

Lending is the most common operation of banks When customer has the need toborrow fund from commercial banks to serve theri business, commercial bank willevaluate, analyze and funding to customers that meet the requirement of bank Thecustomers have to commit to repay both fund and interest on maturity date, usingthe credit to serve the right purpose, guarantee the profitability Therefore,commercial banks usually require mortage in their lending

 Renting

The banks will use the money to buy the property and rent it to customers according

to certain terms After a period of time, the customers have to pay the fund and theinterest to the bank

 Guarantee

The bank commits to execute financial duty for its customer Although it does nothave to lay out, it allows customer to use its reputation to make profit There aremany guarantee forms such as payment guarantee, participating in biddingguarantee or contract performance guarantee

1.2 Short-term credit activity

1.2.1 Short-term fund and demand for short-term fund of companies

Short-term fund is the monetary value of short-term assets which are invested inbusiness Short-term fund has short life cycle

Normally, companies usually take advantage of available short-term funds, onlywhen they are lack of short-term fund, they have to use the short-term loans frombank The lacking of short-term fund of companies may due to the time or scaledifference between inflow and outflow, seasonal sudden demands on increasingshort-term assets Therefore the demand for short-term fund of companies is alsodivided into 2 kinds:

 Frequent demand for short-term fund:

Demand for short-term fund usually comes from the time or scale differencebetween inflow and outflow of companies Inflow and outflow are not always fitproperly If in a period of time, the outflow is higher than the inflow, the companieshave to supplement the shortfall This shortfall is supplemented from resources orreceivable, the rest is supplemented from bank loans

 Seasonal demand for short-term fund:

Besides frequent demand for short-term fund, companies also have seasonaldemand for short-term fund This demand comes from of features of business whichmake the demand for short-term asset suddenly increase

In conclusion, companies always have demands for short-term fund Based on thisdemand, banks provide short-term loans for companies When the credit contract isimplemented, both banks and customers are profitable Short-term loans do not onlybring profit to the bank but also satisfy the demand for short-term fund ofcompanies to serve the business

1.2.2 Feature of short-term loan

Beside basic features of loan, short-term loan also has other features:

 Short-term loan funding the demand for short-term fund of companies such assalary, raw material cost

 Short-term loan has the maturity below one year The fund is only used in term to pay the expense in the situation inflow and outflow are not fit or satisfyseasonal demands

short-1.2.3 Forms of short-term loan

 Overdraft

Overdraft is an operation which the bank allow borrower to spend more money thanthe amount money in their account to certain limit and in a certain time This limit iscalled overdraft limit

To have overdraft, the customer has to make a request for overdraft limit andoverdraft time In the overdraft time, the customer can use cheque, authorizedspending, etc… which exceed the amount of deposit money (but in the overdraftlimit range) When the customer deposits the money in their account, the bank willreceive loan principal and interest The interest will be calculated as below:

Interest = Overdraft interest rate x Overdraft time x Overdraft money

The account which exceeds the overdraft limit will be charged additional fees andsuspense to use this product

Overdraft is based on time and scale difference between inflow and outflow ofcustomer Therefore this product can help the customer in their trading: proactive,fast and promptly

Overdraft is a short-term credit which is flexible, has simple procedures, mainlywithout mortgage and can be provided to companies in few days of one month orfew months of one year to make the payment This product is usually applied withcustomers with high reliability, regular and short-term income

 Short-term loans for production and business (one loan at a time)

This is a short-term loan is usually applied for customer which do not have frequentdemand for loan, do not have the condition to have overdraft limit Companiesmainly use resources and commercial credit to pay for demand of short-term fundbut when they have seasonal demands or special expanding business, they have tomake a loan from the bank When they want to make a loan, they have to make anapplication and show the bank how they are going to use the loan The bank will

analyze customer and sign the loan contract which indicates amount of amount,maturity date, interest rate, disbursement period and other terms if needed.

Based on the contract, the bank will receive loan principal and interest In theprocess of using loan of customer, the bank will supervise the purpose andefficiency of usage, if they find any action that violent the contract, the bank willcollect the debt before maturity date or change it to overdue loan This is a simpleproduct of banks and they will control separately each loan

 Credit line

The feature of this loan is that one application can be used to apply for many loans.When customer makes the application for loan, the bank will analyze credit ofcustomer and if they agree to provide the loan, they will sign a credit contract whichindicates the credit line for the customer The credit line can be understood asmaximum outstanding debt, the customer can borrow or pay many times but theycannot exceed the credit line The credit line can be calculated for the whole period

or at the end of period

Figure 1.Credit line for whole period

Figure 2.Credit line for the end of period

Each time a customer want a loan, they only have to present the plan of using loan,provide documents evidencing and state the demand for the loan After checking thelegal and valid of documents, the bank will give the money to the customer

This is convenient product for customer who has frequent demand for short-termloan The bank does not indicate the maturity date when customer has inflow thebank will collect the debt so the companies can be proactive to manage budget anduse the fund effectively However, loans are not separated into specific periods sobank cannot easily control the efficiency of each loan The bank only can realize theproblem when the companies submit financial report or outstanding loan does notdecrease in a long period of time

Discounting valuable notes

Valuable notes is created mainly from trading products and services on creditbetween customers The seller can keep the valuable notes to ask for money frombuyer on maturity date or bring to the bank to ask for discount berfore maturitydate When the customer bring the valuable notes to commercial banks to ask fordiscount, the commercial banks will keep the valuable notes and give the customer

an amount of money which is calculated based on interest rate on the valuablenotes Beside that, commercial banks can receive the fee for discounting valuablenotes The commerial banks can wait until maturity date to receive the money or

rediscount at the State Bank of Vietnam in case they need liquidity Throughdiscounting valuable notes, commercial bank has provide a short-term credit tocustomer.

1.2.4 Short-term loan procedure

Step 1: Receive application and collect information about customer

When customer makes an application, the bank will start collecting and processinginformation about customer:

- Loan dossiers: strategic plan, repayment plan and related documents

- Mortgage dossiers (if there is a mortgage): list of mortgage asset, legal documents

of mortgage assets, documents that valued mortgage assets by independentevaluation agency

Step 2: Appraisal and appraisal report

After collecting all necessary documents, creditor will start evaluating the customer,analyze financial report, etc… to judge the repayment ability, credit, competitiveability, financial ability They do this by calculating rate, evaluate cash-flow andassets of customer and through this they can know whether the customer can repaythe loan Besides that, the bank can also identify appropriate fund that the bank cangive to the customer The result of analyzing will be shown in a report which is sent

to competent people according to the rules of bank and they will make the decision

Step 3: Signing credit contract and disbursement

After competent people approve the application of customer, necessary procedureswill be completed and the bank and the customer will sign credit contract and startdisbursement

Step 4: Supervising in loan period and ending contract

In the loan period, creditor will supervise closely the loan to guarantee thatcompanies use the loan to serve the right purpose and use it effectively If there isany sign of suspicious action, it will be analyzed carefully and based on that thebank will have handling measures such as: stop disbursement or cancel the contractEnding a contract, the creditor will conclude and record the information about theloan to use when it is necessary

1.3 Short-term loan quality

Short-term loan quality will be judged by effectiveness of loan When loan is usedeffectively and right purpose by customer, create bigger money, according to that,bank will receive repayment and company can repay the loan, cover the expenseand have profit This means the bank has just created positive result for theeconomy of country

1.3.1 Criteria to evaluate short-term loan quality

Credit is the most basic activity of banks and brings most profit to it Moreover,credit also play an important role in development of economy, the bank will be theintermediate between surplus units and deficit unit, through that, the fund ofeconomy is used more effectively As a result the quality of credit is necessary notonly to banks but also to customer The quality of short-term loan is similar to thequality of credit and it is evaluated based on two criteria:

- In the view of bank, the quality of short-term loan attach to the safety of principalloan It means that the loan must be secured and profitable Simple and convenientprocedures will facilitate companies in business and catching opportunities Besidesthat, quality of the loan also means the profit that it brings to the bank The bankingindustry is more and more competitive so each bank has to have their own suitablepolicy and find profitable projects

- In the view of customer, short-term loan of bank has supplied short-term fund tocompanies to guarantee the fluency of business To get this loan, companies have topay a quite huge cost so companies have to use it the most effective way

In conclusion, the quality of a loan is judged based on every period and in bothview of customer and bank To evaluate quality of a loan, we based on qualitativeand quantitative indicators.

Qualitative indicators:

 Ensure rules:

These rules are created to guarantee safety and profitability of bank‘s credit:

- Customer must commit to repay principal and interest on maturity date

- Customer must commit to use the loan to serve the right purpose which has beenagreed by the bank, not to use it illegally and to use it according to the rules ofbank The purpose of the loan which is written in the credit contract must guaranteethat bank does not fund illegal activities and the funding must be appropriate withthe platform of bank Since companies sometimes use short-term loan to investlong-term business with high risk so bank must have rules to force companies to usethe loan with right purpose

- Bank sponsors fund based on effective plan of using loan Since effective plan ofusing loan prove the ability to repay principle and interest of customer so this is thefoundation to rules 1 above

- Guarantee credit analysis process: Credit analysis process is created andstandardized by banks to lower the risk in each loan The content of credit analysisprocess includes:

 Analysis before granting credit

 Creating and signing credit contract

 Safety, precision in transaction is the first criteria with all customers

 Transaction procedures: A good loan must guarantee not only simple, convenienttransaction procedures for customer but also necessary safety rules In competitiveenvironment, simple transaction procedure is also an advantage of banks

Quantitative indicators:

To evaluate quality of short-term loan, we also base on quantitative indicators.These indicators are used to ensure credit quality in the bank’s view:

- Indicators that reflect scale and profitability of short-term loan:

 Total outstanding short-term loan: Reflects the scale of short-term loan of bank,the higher outstanding loan the higher scale, it means that the bank expands short-term loan business and the reputation of the bank is high Normally, highoutstanding loan means high profit

 Credit cycle

Loan revenueAverage outstanding loanThe higher rate means the higher quality of the loan, the banks use capital moreeffectively to participate in the economy

- Indicators that reflect the credit risk of bank

Indicators that reflect the credit risk of bank are valuable addition to evaluatequality of short-term loan If bank has too many risky investments, current rate ofprofit will be high but when there is a loss, the rate of profit in the future will bedecreased

+ Overdue debt

+ Bad debt

+ Rate of using loan for wrong purpose = amount of short-term loan used for wrongpurpose / total outstanding short-term loan

+ Overdue debt rate

+ Bad debt rate

+ Credit risk reserve

1.3.2 Factors that affect quality of short-term loan

Figure 3.Factors that affect quality of short-term loan

 Bank-related factors:

Internal factors are factors that come from bank, it includes:

- Credit policy of bank: Credit policy reflects funding platform of a bank, becomesguidance for every creditor and employees, increases profession in credit analysis,creates unite in credit activity to lower the risk and increase profitability Therefore,credit policy plays an important role in credit quality Each bank has their suitablepolicy to guarantee profitable loan

- Credit analysis process of bank: Quality of short-term loan depends on the creditanalysis process If the process is effective, it will help the bank to choose goodcustomer so the bank will be repaid fully and on time

- Quality of employee: Quality of creditor plays an important role in improvingquality of credit Even when the bank has good policy and credit analysis processbut unprofessional creditors or collusion between creditors and customers, the risk

of bad debt is certain

Customer-related factors:

- If customer does not use the fund for right purpose or try to fraud, it will causerisk for the bank Therefore credit analysis and supervising in loan period of bank isvery important with improving quality of short-term loan

 Macro environment factors:

- Economic environment: Economic environment is one of the most importantfactors that affect credit quality Since bank and customer run the business in theeconomic environment so the credit activity is also impacted by the changes ofeconomic environment If the economy develops steadily, quality of short-term loan

of bank will also be improved

- Legal environment: Business of bank especially credit activity plays an importantrole in economy but it is a risky business If there are too many bad debts, it mightaffect the stability of economy Therefore credit activity of bank is under thesupervising of the government and adjusted by many legal documents If the system

of legal documents is complete and reasonable and the supervision of government

to bank is strict, the quality of credit and short-term loan of bank will increases

- Political and social environment: An unstable society with war or riots surely willnot be a convenient environment for bank or company Therefore business of bankand company are also greatly affected by this