LV Thạc sỹ_Improving the effectiveness of lending to small and medium enterprices at Vietinbank

NATIONAL ECONOMICS UNIVERSITYFACULTY OF FOREIGN LANGUAGES ENGLISH FOR BUSINESS DEPARTMENT ------IMPROVING THE EFFECTIVENESS OF LENDING TO SMALL AND MEDIUM ENTERPRISES AT VIETINBANK

NATIONAL ECONOMICS UNIVERSITYFACULTY OF FOREIGN LANGUAGES ENGLISH FOR BUSINESS DEPARTMENT

- -IMPROVING THE EFFECTIVENESS OF LENDING

TO SMALL AND MEDIUM ENTERPRISES AT

VIETINBANK – BEN THUY BRANCH

NATIONAL ECONOMICS UNIVERSITYFACULTY OF FOREIGN LANGUAGES ENGLISH FOR BUSINESS DEPARTMENT

- -IMPROVING THE EFFECTIVENESS OF LENDING

TO SMALL AND MEDIUM ENTERPRISES AT

VIETINBANK – BEN THUY BRANCH

Firstly and foremost, I would like to convey my special thanks to mysupervisor, Ms …, for her great support, guidance, recommendation, andencouragement to me during my report writing process from March to May of 2013.Without her help, I could not have done this thesis

Secondly, I would also like to give my sincere thanks to the staff in CorporateBanking Department of VietinBank – Ben Thuy branch for their assistance,enthusiasm, and suggestion for me when I was doing my internship there Thanks tothem, I really could understand and do well some specific tasks related to bankingactivities They also provided me with necessary data and figures so that I couldaccomplish my report

Thirdly, I would like to express my gratitude to all the teachers of the Faculty

of Foreign Languages of National Economics for teaching me and giving me thebackground knowledge of related subjects such as English for Banking and Finance,Business Communication, and EAP writing

Last but not least, I also appreciate the support and encouragement of myfamily and my friends, who always encouraged and supported me during mypreparation and accomplishment of this report

TABLE OF CONTENTLIST OF ABBREVIATIONS i

1.1 Introduction of VietinBank – Ben Thuy branch 3

1.1.1 History of establishment and development 3

1.1.2 Organizational structure 3

1.1.3 General business results 5

1.2 An overview of lending activities to SME at VietinBank – Ben Thuy branch 6

1.3 Key terms definitions 7

1.3.1 Bad debts 7

1.3.2 Interest rates 7

1.3.3 Lending 7

1.3.4 Outstanding loans 7

1.3.5 Small and medium enterprises 7

CHAPTER II – THEORETICAL FRAMEWORK 8

2.1 Joint-stock commercial banks’ activities of lending to small and medium enterprises 8

2.1.1 Definition 8

2.1.2 Types of lending 8

2.1.3 The role of lending to small and medium enterprises 9

2.1.4 Characteristics of lending to small and medium enterprises 10

2.2 Definition of effectiveness of lending to small and medium enterprises of joint-stock commercial bank 11

2.3 Criteria to define the effectiveness of lending to small and medium enterprises of joint-stock commercial bank11

2.4 Factors affecting to the effectiveness of lending to small and medium enterprises of joint-stock commercial bank13

CHAPTER 3 – ANALYSIS AND FINDINGS 17

3.1 The real situation of lending to small and medium enterprises 17

3.1.1 Lending procedure to small and medium enterprises 17

3.1.2 The number of SMEs having credit relationship with VietinBank – Ben Thuy branch 23

3.1.3 Lending revenue and sales of debt collection for SMEs at VietinBank – Ben Thuy branch 24

3.1.4 The situation of outstanding loans and loans growth rate to SMEs

25

3.1.5 Real situation of bad debt 29

3.1.6 Profit from lending activities to SMEs 30

3.2 Evaluating the effectiveness of lending to small and medium enterprises

of Vietinbank – Ben Thuy branch 31

3.2.1 The achievement from lending to small and medium enterprises of Vietinbank – Ben Thuy branch 31

3.2.2 The disadvantages of lending to small and medium enterprises of Vietinbank – Ben Thuy branch 32

3.2.3 The reasons for the disadvantages of lending to small and medium enterprises of Vietinbank – Ben Thuy branch 33

4.2.1 Developing appropriate lending policies for SMEs 38

4.2.1.1 Improving procedure of lending 38

4.2.1.2 Applying flexible interest rate range 38

4.2.1.3 Diversifying lending methods 39

4.2.1.4 Implementing flexible loan guarantee 39

4.2.2 Improving the quality of lending evaluation, inspection, and

monitoring 40

4.2.3 Improving the quality of the LOs 41

4.3 Recommendation to improve the effectiveness of lending to SMEs of VietinBank – Ben Thuy branch 41

4.3.1 Recommendation to the Government 41

4.3.2 Recommendation to the State Bank 42

4.3.3 Recommendation to VietinBank headquarters 42

REFERENCES

VietinBank Ben Thuy joint stock commercial bank for

industry and trade

LIST OF TABLES

Table 1: Results of overall operations in the period of 2010 to 2012 5Table 2: The number of SMEs having credit relationship with VietinBank – BenThuy branch in the period of 2010 to 2012 23Table 3: Lending revenue and sales of debts collection for SMEs in VietinBank –Ben Thuy branch in the period of 2010 to 2012 (Unit: billion VND) 24Table 4: Outstanding loans to SMEs of VietinBank – Ben Thuy branch in the period

of 2010 to 2012 25Table 5: Outstanding loans to SMEs based on duration in the period of 2010 to 2012 27Table 6: Real situation of bad debt to SMEs in the period of 2010 to 2012 29Table 7: Profit from lending activities to SMEs in the period of 2010 to 2012 30

LIST OF CHARTS

Chart 1: Organization structure of VietinBank – Ben Thuy branch 4Chart 2: Outstanding loans to SMEs based on duration of VietinBank – Ben Thuybranch in the period of 2010 to 2012 28

EXECUTIVE SUMMARY

In recent years, in Vietnam, the number of SMEs tends to increase and growstronger As a type of business accounting for over 90% of all businesses in theeconomy, SMEs play a key position in contributing significantly to the economicgrowth of the country When SMEs want to operate stably and increasinglydevelop, there is a need of improving basic elements such as infrastructure, scale,and resources in which financial resources are considered as the very firstdeterminant Currently Vietnam SMEs are lacking capital for business expansion,machinery improvement and new equipment as well as capital for other activitieswhen the economic situation is gloomy and more difficult Because of small scale,

to expand production and business activities, SMEs rely heavily on bank loans The issue of accessing to loan capital is not easy now The reason is that SMEs

do not have great prestige, much equity and high financial capacity Additionally,business situation is so difficult and risky that banks hesitate to grant loans toSMEs Nevertheless, recently, many banks have realized the huge potential inSMEs Many commercial banks including VietinBank – Ben Thuy branch havebeen constantly improving more lending products for SMEs However, asmentioned before, the development of lending to SMEs remains many potentialrisks to banks because of limited capacity of using loan capital and unqualifiedmortgage To solve this problem, it is necessary to continuously enhance the overallquality of lending, especially lending to SMEs Stemming from the above practices,

I have decided to choose "Improving the effectiveness of lending to small and medium enterprises at VietinBank – Ben Thuy branch" as the topic for my

This dissertation is divided into four main chapters:

Chapter I: Introduction This chapter presents an overview of VietinBank –

Ben Thuy branch’s history of establishment and development The author also

introduces some general information about business results and lending activities atthe branch.

Chapter II: Theoretical framework This chapter will provide readers with

basic theories related to lending to SMEs

Chapter III: Analysis and findings In this chapter, the author will analyze the

data collected in the period of 2010 to 2012 and evaluate the current situation oflending activities to SMEs by VietinBank – Ben Thuy branch At the same time, theauthor will point out operation results, achievement, disadvantages and causes ofthose disadvantages

Chapter IV: Recommendations The final chapter will provide some solutions

to improve the effectiveness of lending activities to SMEs by the branch

Consequently, it is essential for banks to pay more attention to enhancing theeffectiveness of banking credit in general and lending to SMEs in particular Withthis task performed well, the bank will surely gain great success and achievement interm of both making profit for itself and confirming the position of the bank in thebanking and financial market today

1 Introduction of the research topic

In the context of the evolving and highly competitive financial markets, banksplay an important role in the development of the national economy Among bankingactivities, lending is an important part in determining the existence anddevelopment of the bank Therefore, it is essential for banks to focus on improvingthe quality of lending

There are many types of lending such as lending based on duration, on lendingmethods and even the objectives of lending In this case, based on theoreticalknowledge I have learned in my university and practical experience during myinternships at VietinBank – Ben Thuy branch, I decide to do a research on methods

to improve the effectiveness of lending to small and medium enterprises ofVietinBank - Ben Thuy branch

2 Rationales

As mentioned above, lending is an important activity for the operation of bothSMEs and banks For SMEs, lending is a tool to assist them to maintain smoothbusiness operations and development, and even to invest in highly profitablesectors For banks, lending is seen as an activity bringing most of profit to the bank

In this way of perspective, effectiveness of lending has a large impact on not onlybanks, SMEs but also on the whole economy However, the quality of lending toSMEs in VietinBank – Ben Thuy branch is not so effective and thus cannot bringgreatest possible profit to the bank This has posed a problem of concern, which ishow to improve the efficiency of lending, or in other words, how to maximize theeffectiveness of lending to SMEs to ensure the quality of capital and the use ofcapital of the bank and enterprises

VietinBank – Ben Thuy branch?

4 Scope of the research

This research merely focuses on the case of VietinBank – Ben Thuy branch inthe period of 2010 to 2012 All the date, figure, and information are in this period oftime and collected from the data system of the bank in the respect of the bankDirector and the head of Corporate Banking Department

5 Methodology

The two main methods used in this research are comparing and analyzing Thefigures and information are collected from two main sources The primary data ofthe real situation of its business operation is collected from the data system ofVietinBank – Ben Thuy branch The secondary data is collected from newspaper onthe internet and books of the related topic

When all the necessary data and information have been gathered, the authoruse methods such as economic statistics, comparison, and synthesis analysis tofigure out the achievements and limitations of the business operation of the bank inthe period of 2010 to 2012 In addition, the author use tables and charts to illustratethe comparison between two years (1010-1011 and 1011-2012) through which theauthor draw general conclusions for issues studied

CHAPTER 1 – INTRODUCTION1.1 Introduction of VietinBank – Ben Thuy branch

1.1.1 History of establishment and development

Ben Thuy joint stock commercial bank for industry and trade, abbreviated asVietinBank – Ben Thuy branch, separated from Nghe An joint stock commercialbank for industry and trade on the date of 1st January 1995, is the bank directlyunder Vietnam joint stock commercial bank for industry and trade and has itsheadquarters located on number 229 Le Duan street in Vinh city of Nghe Anprovince

Since its establishment, VietinBank – Ben Thuy branch has been constantlyimproving in terms of both sales and performance quality The scope of the bank'sactivities is not only confined to the area of Vinh City but also expanded to otherareas and include a number of co-funded projects in other provinces The bank has avariety of business activities and invests capital in all areas and economic sectorspermitted by the government

With the strategic goal "Building an effective, safe and stable business withgood financial status and modern technology; expanding and developing bankingservices and also improving the quality of human resources in order to have a strongcompetition with other rivals in the area", VietinBank – Ben Thuy branch hasdiversified its business activities, innovated organizational management, andmodernized banking technology at the aim of serving customers with satisfaction.Along with other banks, VietinBank – Ben Thuy branch has contributedsignificantly to the economic development of Nghe An province

1.1.2 Organizational structure

Currently VietinBank – Ben Thuy branch is running under the managementand organization model based on functions With the total number of staff up to 106people, VietinBank – Ben Thuy branch has properly arranged for each individual asuitable position based on their professional qualifications, family background, and

so on The hierarchical organizational pattern of the branch is described as below:

Chart 1: Organization structure of VietinBank – Ben Thuy branch

As can be seen from the table above, VietinBank – Ben Thuy branch includesone head office, four trading room, one outlet and six savings funds located in theresidential area of the city These departments are specialized by functions andspecific tasks They, however, are still inseparable parts of the bank because they

Accounting department

Duc Loc trading roomTrading room No.8Trading room No.6Truong Thi trading room

Risks and NPL management

Corporate banking department

Transaction accounting department

Transaction accounting department

Savings fund No.7Savings fund No.5Savings fund No.2Card team

Financial accounting department

Financial accounting department

(Source: VietinBank – Ben Thuy branch)

have reciprocal relations with each other under the administration of the Board ofdirectors, performing business activities at the aim of making profits for the bank

1.1.3 General business results

In 2010, banks in Vietnam had some positive movements together with higheconomic growth against the economic slump in the previous period of 2008 to

2009 Almost banks made huge profits even the new ones However, the situation in

2011 began to got worse when interest rates of raising capital and lending allincreased to over 20% per year that led to the black credit default and increase inbad debts Up to 2012, the banking sector continued to get worse as bad debtssoared and profits plummeted along with a tight credit policy and a decrease in theinterest rate of the State Bank as well as the general bleak economic situation As aresult, credit growth was low and this made banks reluctant to provide credit

However, VietinBank – Ben Thuy branch still kept its smooth operations,achieved big profits and remained the credit growth over the years in the period of

2010 to 2012 This is due to its wise credit policies and restriction to stockinvestment lending and real estate investment lending The results of overalloperations are expressed in the chart below:

Table 1: Results of overall operations in the period of 2010 to 2012

From the table above, in three years 2010, 2011 and 2012, pre-tax profit ofVietinBank – Ben Thuy branch steadily increased over the years In 2011, pre-taxprofit was 54 billion VND, which can be understood as 8 billion VND or 17.39%higher compared with that of 2010 In 2012 pre-tax profit of 76 billion VND whichcould be translated into 22 billion VND or 40.74% higher compared with that of

2011 In terms of implementation of tight credit policy, decrease in interest ratesand limitation of lending to a specific sector, VietinBank – Ben Thuy branch stillmaintained its stable business operations

The table also shows the slope of revenue, the fact that the costs comparedbetween 2011 and 2010 got bigger than that of 2012 and 2011 reflects the actualsituation when in 2011, interest rates rose subsequently leading to the increase inrevenue and costs Up to 2012, when interest rates declined and credit policy wastightened, there was obviously a decrease in revenue and costs However, profitsbefore tax in the period of 2010 to 2012 steadily grew This showed a great effort inadministration and effective implementation of business of the branch

1.2 An overview of lending activities to SME at VietinBank – Ben Thuy

branch

VietinBank – Ben Thuy branch is located in an area of high competitivepressure and a few small and medium sized businesses That is why the bankconsiders lending activities as one of the most important operations Over the recentyears, the economy was unfavorable but total annual lending revenue in general andSME lending revenue in particular both stayed consistently high with stable growthrate over the years

However, the impacts of poor economic situation in 2012 have posed apressure on lending activities of VietinBank – Ben Thuy branch Many smallenterprises went bankruptcy and some could not be able to repay for the bank Thiscreated a challenge for the branch to figure out solutions to deal with this problem.Therefore, it is essential to conduct a clear and deep study to find out effectivesolutions

1.3 Key terms definitions

1.3.1 Bad debts

A bad debt is an amount owed to a business or individual that is written off by the creditor as

a loss because the debt cannot be collected and all reasonable efforts to collect it have been exhausted This usually occurs when the debtor has declared bankruptcy or the cost of pursuing further action in an attempt to collect the debt exceeds the debt itself (en.wikipedia.org)

1.3.2 Interest rates

An interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from a lender Specifically, the interest rate is a percent of principal paid a certain amount of times per period (usually quoted per annum) Interest rates are normally expressed as

a percentage of the principal for a period of one year (en.wikipedia.org)

1.3.3 Lending

According to Section 16, Article 4 of the law No 47/2010/QH12 of the Law

on credit institutions lending regulations, lending is a form of credit, under whichthe lender assigns or delivers to customers a commitment to use an amount ofmoney for specific purposes in a certain period of time as agreed with the principle

of repayment of the principal and interest

1.3.4 Outstanding loans

An outstanding loan is the portion of the loan that has not been paid As payments are applied towards the loan balance, the amount outstanding decreases The lower the interest rate, the faster the balance declines when payments are made (ehow.com)

1.3.5 Small and medium enterprises

SMEs are enterprises that have small scale in terms of capital, workforce and profit SMEs can be divided into three categories: micro, small and medium enterprises According to the criteria of the World Bank Group, micro enterprises are enterprises with number of employees below 10 people, and small businesses have the number of employees from 10 to 50 people, while medium-sized enterprises have from 50 to 300 labors In Vietnam, according to Decree

labors per year are considered micro enterprises Enterprises having from 10 to less than 200 employees are considered small enterprises and from 200 to 300 workers are seen as medium enterprises (http://en.wikipedia.org)

CHAPTER II – THEORETICAL FRAMEWORK2.1 Joint-stock commercial banks’ activities of lending to small and medium enterprises

2.1.1 Definition

According to Section 16, Article 4 of law No 47/2010/QH12 of the Law oncredit institutions lending regulations, lending is a form of credit, under which thelender assigns or delivers to customers a commitment to use an amount of moneyfor specific purposes in a certain period of time as agreed with the principle ofrepayment of the principal and interest

Such lending activity to SMEs by commercial banks can be interpreted thatthe bank transfer a sum of capital due to SMEs' needs and after a certain period oftime as agreed upon by both parties, the enterprises shall be responsible to repay theprincipal and an amount of interest This amount is the income of the bank

In the banking business, lending is the activity bringing the most profit andalso the main source of income for the bank Loans to corporate customers are typesaccounting for the largest proportion of the bank's lending activities

However, the issue of risks and difficulties in debt claiming can alwayshappen It requires banks to implement well the lending process, to monitor the use

of loans and business operations and to timely figure out problems to ensure lendingefficiency

2.1.2 Types of lending

In the market economy, lending activities are growing and highly competitive

So banks must conduct diversified forms of lending to fit and meet the needs of thebusinesses and to ensure loans are used effectively Depending on the bank criteria,lending are classified into many different types:

Based on duration, Assoc Prof Phan Thi Thu Ha (2002:87) has divided loansinto 3 types: short-term, medium-term and long-term loans

- Short-term loan: A type of loan with a term of less than one year, used tosupplement a temporary shortage of working capital of the businesses

- Medium-term loan: This is a type of loan with a term of one to five years.This type of loan is granted for purchase of fixed assets, technical improvement andinnovation, expansion and small construction with rapid capital recovery.

- Long-term Credit: A type of loan with a term of over five years, used tofinance the construction of new factories, infrastructure, improvement and large-scale expansion

Based on the methods of lending, according to Assoc Prof Phan Thi Thu Ha,Ph.D (2002: 115) loans are divided into 6 types: overdraft, direct loans, loans withlimits, rotating loans, installment loans, and indirect loans

- Overdraft: a form of bank loans thereby allowing borrowers to borrow more

than the amount on their current account up to a certain limit and within specifiedtime This limit is called overdraft limit

- Direct loans: a form of direct funding for people in need, and borrowers

directly repay the loan to the bank

- Term loans: a form of loan for regular business loans, loans regularly

participate in the production process Accordingly, the bank provides businesseswith lending limit, which is the maximum balance at a certain time

- Rotating loans: the form of lending based on the circulation of goods.

Enterprises while purchasing can be lack of funds, in this case, banks provide loans

to them and collect debt when the enterprises sell products

- Installment loans: the form of loans in which the principal and interest are

repaid many times in a term

- Indirect loans: a form of loan through the purchase of debt agreements or

documents generated and remained within the payment term

2.1.3 The role of lending to small and medium enterprises

SMEs always play a very important role in the economic development of thecountry Competitiveness of SMEs is increasingly improving This is reflected inthe proper investment for new machinery, equipment and technologies Capital thatmainly caters to these things is mainly from bank loans It can be said that bankinglending plays a very important role in the development and survival of SMEs This

is shown in detail in the following points:

 Bank lending contributes to the continuous and smooth operation ofSMEs.

 Bank lending contributes to improve the efficiency of capital use ofSMEs

 Bank lending contributes to the formation of the optimal capital structurefor SMEs

 Bank lending contributes to mobilize capital for production and improvethe competitiveness of SMEs (voer.edu.vn)

2.1.4 Characteristics of lending to small and medium enterprises

 According to Mr Huynh Buu Quang, Deputy General Director of BankLimited HSBC Vietnam, lending is a relationship based on mutual trust, equalityand mutual benefit When businesses are reputable, reliable and banks believe thatcustomers will use loans effectively and will repay the full amount and its additionalinterest At that time, the bank will issue a loan to businesses (http://cafef.vn)

 Based on the definition mentioned above, it can be said that lending is anactivity in which customers use loans for their business activities After one period

of time, as previously agreed, the customer will return the full principal

 The value of repayment is often higher than the original amount Thismeans besides the principal, customers have to pay the banks an amount of moneycalled lending interest

 Lending activity is affected by many objective and subjective factors.Objective factors are factors from the economic, political, social and technologicalenvironment as well as from customers and so on Subjective factors are frombanks, such as lending policies, lending process, lending information and so on

 In lending, the issue of risks and difficulties in debt claiming can alwayshappen In fact, according to Prof Phan Thi Thu Ha (2002:154), when performinglending activities, banks do not consider that the issued loan would be a loss But interm of overall financial management, losses should be predicted In the case thatbanks can keep the ratio of loss in an expected level, then it would be a success infinancial management of banks

2.1.5 Procedure of lending to small and medium enterprises

In the book titled “Commercial bank management”, Peter Rose (2008:520) hasmentioned the steps in lending process According to him, there are six steps listedbelow:

- Finding prospective loan customers

- Evaluating a prospective customer’s character and sincerity of purpose

- Making site visits and evaluating a prospective customer’s credit record

- Evaluating a prospective customer’s financial condition

- Assessing possible loan collateral and signing the loan agreement

- Monitoring compliance with the loan agreement and other customer serviceneeds

2.2 Definition of effectiveness of lending to small and medium enterprises of joint-stock commercial bank

Writing about the effectiveness of lending to SMEs, Ms Phan Thi Cuc(2008:76) has defined this term as meeting the requirements of customers in term ofloans in line with the economic development orientation of both the local and theSatte Additionally, it also helps to ensure the survival and enhancement of banks,reach the needs of businesses timely and edequately and make these businessessatisfied and comfortatble during and after transactions with banks Consequently,these things help banks to achieve their profit goal

2.3 Criteria to define the effectiveness of lending to small and medium enterprises of joint-stock commercial bank

The effectiveness of lending to SMEs of joint-stock commercial banks isevaluated by its growth and safety, and the capacity of increasing profits to banks.Here are some selected indicators suggested by M.A Nguyen Tien Trung to assessthe effectiveness assessment for lending to SMEs by joint-stock commercial banks:

 Growth of SME lending:

 Total outstanding loan: This indicator illustrates the scale of SME lending

of the bank

This indicator shows the proportion of loans to SMEs in total loans Thisstructural analysis will help the bank to realize what types of loan it should paymore attention to be accordance with the capacity of the banks

 SME credit growth ( the increase in loan amount in a period of time)

This helps us to see how the value of loans to SMEs increase or decrease

in a period of time

 SME loan structure based on duration, currency, and interest rate

In this work, we will focus on SME loan structure based on duration

 Safety of SME credit:

 Bad debt ratio = bad debts / Total outstanding loans (%)

According to Wikipedia, “a bad debt is an amount owed to a business orindividual that is written off by the creditor as a loss (and classified as an expense)because the debt cannot be collected and all reasonable efforts to collect it havebeen exhausted This usually occurs when the debtor has declared bankruptcy or thecost of pursuing further action in an attempt to collect the debt exceeds the debtitself.”

According to Vietnamese laws, bad debts are debts that are overdue from 91 tomore than 360 days From 91 to 180 days, the borrowers are not able to pay theprinciple and interest in full and timely manner and some loss in these two amountsare possible From 180 to 360 days, the loss is highly possible and over 360 days,the debts are uncollectable (Decision No.18/2007/QD – NHNN)

 Profitability of lending to SMEs:

 Total lending revenue

 SME lending revenue / Total lending revenue

dong-tin-dung)

(http://www.trungblc.com/index.php/hoc-thuat/9-chi-tieu-danh-gia-hieu-qua-hoat-2.4 Factors affecting to the effectiveness of lending to small and medium enterprises of joint-stock commercial bank

of the bank's capital and borrowing needs of customer When these factors change,the lending policies change as well For each customer, the bank may offer differentpolicies accordingly

Studying this issue, Mr Ho Dieu (2002:15) has highlighted that a sound andfavorable lending policy will attract more customers to ensure profitability fromlending activities on the fundamental of limiting risks, complying methods andguidelines of the Government, and ensuring fair society This means that the quality

of lending depends on the lending policies of banks Any bank which wants to have

a good lending quality also must have a good lending policy in accordance with thereality of the market as well as banks

2.4.1.2 Lending information

In his book titled “banking management”, Mr Ho Dieu (2002) has alsoemphasized on the importance of lending information According to him, thecollected information about customers will enable banks to understand clearly anddeeply their customers’ ability of repayment that accordingly helps banks to avoid

or minimize risks

2.4.1.3 Personalities and qualifications of LOs

Quality of bank staff is crucial to the success or failure of the bankingbusiness The reason is that LOs are directly involved in all stages of the lending

For this matter, Assoc Prof Phan Thi Thu Ha (2002:157) also pointed out thatLOs without ethics, lacking responsibility, intentionally breaking the law will affectbadly to lending quality Qualification also determines the success of lending LOswith professional skills and lots of experience will lead to the success of lendingactivities because they can figure out problems raised during the process of lending,realize mistakes and know how to fix them and so on Besides, their experience willenable them to understand the potential of customers’ projects and know where theyshould lend money in.

In addition, LOs need to have a broad understanding of legal, social andeconomic environment as well as the country's development path, the changes ofthe market and so on This helps them to be able to predict fluctuations that mayoccur and thus give advices to customers to rebuild their business plans accordingly

2.4.1.4 Fund mobilization

According to Vu Thu Hien in her article titled “factors affecting to the lendingactivities of joint stock commercial bank” on VOER, funding mobilization alsoaffect to the lending quality Short-term fund is used for lending short-term loansand medium and long-term fund mobilized is for medium and long-term loans With

a great amount of fund mobilized, the banks are more likely to provide loans andexpand its lending activities If the bank does not have the appropriate termsbetween deposit and lending source then there will be an unexpected liquidity riskhappening

2.4.1.5 SMEs’ capacity and honesty

For these two factors, Phan Thi Thu Ha (2002:157) has also made somepoints The capacity of the customers is crucial to the customer’s effectiveness inusing loans If the customer has weak capacity such as the customers are unable topredict fluctuations in the market demand, has little experience in production,distribution and promotion of products and the like, they will easily be broke down

in competition This thereby will affect to the ability to repay the bank then thebank's lending quality is affected badly And vice versa, high capacity of customerleads to strong competitiveness in the market and loans are used effectively

Honesty of customers has a strong impact on the bank's lending quality If theenterprises borrowing money from banks do not provide true data, violate the issued

accounting regulations, then it will be difficult for banks to understand deeply andcorrectly their business situations as well as the management of loans on which thebanks will base to make the decision of lending or not

If customers use bank loans for improper business objectives and purposes,they will be easily unable to repay timely and fully

2.4.2 Objective factors

2.4.2.1 Social-economic factor

Vu Thu Hien has also mentioned the impact of two more factors

Firstly, economy is a system that includes economic activities havingdialectical relationship Activities of commercial banks can be seen as a bridgebetween the different sectors of the economy Therefore, the stability or instability

of the economy will have a strong impact on the bank's activities, especially lendingactivities

Macroeconomic variables such as inflation and crisis will be a huge impact onlending quality A stable economy will moderate inflation to facilitate high-qualitylending It means if businesses operate in a stable environment, the ability togenerate higher profits and repay principal and interest to the bank timely and fullywill be higher In contrast, when the economy changes, the business operations godown which will affect to the bank's ability to collect debts

The second is social factor Lending relationships are made on the basis oftrust It is a bridge between banks and customers Morals affect to lending quality

In the case of bad social ethics in which people take advantage of the trust to benefitthemselves, the quality of lending will reduce surely Furthermore, if educationallevel is not high and understanding of banking operations is poor, the lendingquality will get worse accordingly (www.voer.edu.vn)

2.4.2.2 Political factor

The policy of the Government, which is stable or unstable also impacts onlending quality When this policy is not stable, it is difficult for enterprises inproduction and business activities, thereby hindering the repayment of bank debtand vice versa

The legal system is the basis for the regulation of activities in the economy If

troubles Conversely, if it matches the actual situation, it will create a legalenvironment for all business activities to operate smoothly and achieve good results.(Vu Thu Hien, 2010).

Above are the main factors affecting to the lending quality of the commercialbanks To improve the quality of credit, together with practical performance of thecommercial banks, we need to study and properly understand those factors so wecan figure out feasible remedies to any situation

CHAPTER 3 – ANALYSIS AND FINDINGS3.1 The real situation of lending to small and medium enterprises

3.1.1 Lending procedure to small and medium enterprises

Procedure of lending to SMEs in VietinBank – Ben Thuy branch is aninternally consistent process of providing loans to SMEs However, in eachdifferent period of time and for different credit products, there may be someregulations that are required, encouraged or even not applied to the procedure Thedetailed procedure is as follows:

A New customer research and marketing

Doing new customer research and marketing

The corporate banking department plans and conducts research and marketing

on new customers on the basis of local economic situation, goals, orientations andgrowth objectives of outstanding loans according to the assigned target of the HeadQuarter Lending officers doing this job are supposed to understand and master thelending policies and regulations on lending

Lending officers meet and study about corporate customers and theirbusinesses in terms of scale, products, finance, and loans from which Los willintroduce and give advices to the clients on the bank's lending products Then, theywill store the information and make a report on customer marketing

 Developing relationships with current customers.

LOs need to know the demand for lending products, and business plan ofcorporate customers regularly, report to the head of the department to promptlydeploy customer care policy effectively

Each of LOs must keep the customer relationship they are in charge, and need

to record sufficiently the information about transactions with customers They alsoneed to implement customer care policy, customer support in the areas of businessand finance At the same time, they have to consider and evaluate the products andservices provided to have appropriate adjustments timely