LV Thạc sỹ_Enhancing the quality of medium and long term credit in agribank

NATIONAL ECONOMICS UNIVERSITY FACULTY OF FOREIGN LANGUAGES ENGLISH FOR BUSINESS DEPARTMENTENHANCING THE QUALITY OF MEDIUM AND LONG-TERM CREDIT IN VIETNAM BANK FOR AGRICULTURE AND RURAL

NATIONAL ECONOMICS UNIVERSITY FACULTY OF FOREIGN LANGUAGES ENGLISH FOR BUSINESS DEPARTMENT

ENHANCING THE QUALITY OF MEDIUM AND

LONG-TERM CREDIT IN VIETNAM BANK FOR

AGRICULTURE AND RURAL DEVELOPMENT – HUU

LUNG BRANCH

NATIONAL ECONOMICS UNIVERSITY FACULTY OF FOREIGN LANGUAGES ENGLISH FOR BUSINESS DEPARTMENT

ENHANCING THE QUALITY OF MEDIUM AND

LONG-TERM CREDIT IN VIETNAM BANK FOR

AGRICULTURE AND RURAL DEVELOPMENT – HUU

LUNG BRANCH

First of all, from bottom of my heart, I would like to send my most sincerethanks to Ms…, Faculty of Foreign Language - Department of Business English -National Economics University, who has supported me during my report writingprocess Without her whole – hearted instruction, I could not have accomplishedthis report

Secondly, I would also like to express my great attitude to Mr…, the director

of Agribank – Huu Lung branch and all staff in Credit Department, whoenthusiastically offered me with the very first ideas on research methods, preciouscomments and encouragement during my internship process I have learned a lotfrom his precious knowledge about credits as well as his industriousness and bigdedication in work Thanks to his great assistance, I have finished this report

Additionally, I also want to show my deep gratitude to all teachers of theFaculty of Foreign Languages, National Economics University for helping me tocultivate background knowledge of some subjects related to my research such asEnglish for Banking and Finance, English for Management

Finally, I do want to give the last grateful sentence to my family and friendswho always stand by me and continuously encourage me during four years inNational Economics University They are really the greatest spiritual motivation for

me to make my best efforts to perfect myself and overcome the most difficult time

as a student

Because of limited experience and lack of time, the report might have manyshortcomings I am looking forward to receiving any comments to make my reportbetter

TABLE OF CONTENTS

LIST OF ABBREVIATIONS i

LIST OF FIGURES ii

LIST OF TABLES ii

EXECUTIVE SUMMARY iii

INTRODUCTION 1

1 Introduction of the research topic 1

2 Rationales 1

3 Research questions 2

4 Scope of the research 2

5 Methodology 2

CHAPTER I: INTRODUCTION 4

1.1 Introduction of Agribank – Huu Lung branch 4

1.1.1 History of establishment and development 4

1.1.2 Organizational structure 5

1.1.3 Functions and missions 7

1.1.4 Several business results 8

1.2 The key term definitions 9

1.2.1 Credit 9

1.2.2 Outstanding loan 9

1.2.3 Overdue debts 9

1.2.4 Bad debt 10

CHAPTER II: THEORETICAL FRAMEWORK 11

2.1 Overview of medium and long-term credit 11

2.1.1 Definition of medium and long-term credit 11

2.1.2 The role of medium and long-term credit in the market economy 11

2.1.2.1 With respect to the economy 11

2.1.2.2 With respect to enterprises 12

2.1.2.3 With respect to banks 13

2.2 Criteria to assess the quality of medium and long-term credit 13

2.2.1 Overdue debt ratio 13

2.2.2 Income from credits 14

2.2.3 Credit capital turnover 14

2.3 Factors affecting to the quality of medium and long-term credit 15

2.3.1 Factors from banks 15

2.3.1.1 Lending strategy 15

2.3.1.2 The capability of the capital source 15

2.3.1.3 Lending procedure 16

2.3.1.4 The quality of human resource 16

2.3.2 Factors from customers 17

2.3.2.1 Customers’ capacity 17

2.3.2.2 Customers’ reputation 17

2.3.2.3 Customers’ asset ownership 18

2.3.3 Other objective factors 18

2.3.3.1 Economic environment 18

2.3.3.2 Legal environment 18

2.3.3.3 Policies from Government 19

CHAPTER III: ANALYSIS AND FINDINGS 20

3.1 Credit-worthiness and credit risk management in Agribank – Huu Lung branch 20

3.1.1 Loans situation 20

3.1.2 Structure of outstanding loans 21

3.1.3 Term loans based on type of business 24

3.1.4 Term loans based on economic sector 25

3.1.5 Bad loans 26

3.2 Assessment of medium and long-term credit quality in Agribank - Huu Lung branch 26

3.2.1 Achievements 26

3.2.2 Limitations 27

3.2.3 Causes 28

3.2.3.1 Subjective causes 28

3.2.3.2 Objective causes 29

CHAPTER IV: RECOMMENDATIONS 31

4.1 Orientation of Agribank - Huu Lung branch to enhance the quality of medium and long-term credit in the next periods 31

4.1.1 Business plan in 2013 of Agribank – Huu Lung branch 31

4.1.2 Orientation for developing medium and long-term credit activities 32

4.2 Recommendations to enhance the quality of medium and long-term

credit at Agribank - Huu Lung branch 32

4.2.1 Strengthening capital mobilization and researches on the capital source with low cost 33

4.2.2 Advancing the quality of project assessment and the management of lending process 33

4.2.3 Enhancing the inspecting process before, during and after lending 34

4.2.4 Improving the quality of human resource 35

4.2.5 Expanding marketing activities 36

4.2.6 Developing customer consulting centers 36

4.2.7 Simplifying lending procedures 37

4.2.8 Supporting solutions from customers 37

4.3 Proposals to enhance the quality of medium and long-term credit at Agribank - Huu Lung branch 38

4.3.1 Proposals to the State 38

4.3.2 Proposals to the State Bank 38

4.3.3 Proposals to Agribank 39

CONCLUSION 40 APPENDIX

REFERENCES

LIST OF ABBREVIATIONS

Agribank - Huu Lung branch Vietnam Bank for Agriculture and Rural

Development - Huu Lung branch

21

Table 5: Medium and long-term loans based on type of business (2010 – 2012)

24

EXECUTIVE SUMMARY

Nowadays, Viet Nam has been developing the mechanism of oriented market economy, which has been controlled by the clear-sighted leadership

socialist-of the Vietnamese Party and State, and also has undergone the process socialist-of

“Industrialization and Modernization”, which targets at the increase in people’sproperty, the nation’s strength, the society’s fairness, democratization, andcivilization In facts, whether a country’s economy and society is strong and healthy

or not, is much dependent on the effectiveness of banking and finance activities.Therefore, to respond to the State’s the process, as well as reach these above targets,

it is required that credit officers in banks need accomplish their roles in makingright decisions to lend enterprises or households in order to obtain the highestprofits, minimize the credit risks, and keep the capital source in safety also

In Agribank – Huu Lung branch, credit activities play a key part in not onlythe existence and development of the branch but also the growth of its district andour country in general During the “Industrialization and Modernization” process,like other organizations throughout the country, enterprises in Huu Lung districtalso have been increasing the facility development, the technique renovation, andthe technique equipment improvement This certainly asks for a great amount ofmedium and long-term capital, which can be well-supported by banks, specifically

by the credit capital source from banks However, the problem here is how to makeuse of most of the medium and long-term capital’s positive aspects and to avoidwastefulness in enterprises’ and households’ business also In reality, it is notdenied that the more the quality of medium and long term credit is expanded andimproved, the more the medium and long term capital only can improve its positiveroles However, the ceaseless changes of the market economy make it impossible topredict all potential risks and their influences on credit in general and medium andlong-term credit of the whole banking system as well as of Agribank – Huu Lung

Branch in particular It is the reason that urges me to choose the topic: “Enhancing

the quality of medium and long-term credit in Agribank – Huu Lung branch”

to do a research

The purpose of this report is to analyze the current situation of the mediumand long term credit activity in Agribank – Huu Lung branch from 2010 to 2012and then propose some solutions to enhance the quality of these kinds of credit

Data was mainly extracted and calculated from its business department’s financialdocument and some other internal papers

This dissertation is divided into four main chapters:

Chapter 1: Introduction This chapter presents a brief overview of Agribank– Huu Lung branch’s establishment, organizational structure, missions and somebusiness results in particular

Chapter 2: Theoretical framework This chapter will provide readers with theessential background knowledge of the banking credit and especially the mediumand long-term credit

Chapter 3: Analysis and findings In this chapter, the author analyzes andevaluates the current situation about the quality of medium and long-term credit inAgribank – Huu Lung branch within 3 years At the same time, the obtained results,limitations and causes will be drawn out

Chapter 4: Recommendations The final chapter is supposed to give somerecommendations to improve the effectiveness of the medium and long-term credit

in Agribank – Huu Lung branch

As a result, Agribank – Huu Lung branch should continuously pay muchattention to improving the quality of credit, especially the quality of medium andlong term credit so that the branch can gain the best outcomes contributing to thestatement of its certain position in the whole banking system and actually makinggreat contribution to the society’s development

1 Introduction of the research topic

At the dawn of the 21st century, the rapid growth of globalization andinternationalization have been broadening, deepening and speeding up world-wideinterconnectedness in all aspects of the world economy To fit well with thesituation, Vietnam has developed an open market-oriented economy which puts ahigh premium on co-operation and integration In that context, all organizations andenterprises have responded the State’s this policy by intensifying the facilitydevelopment, the technique renovation, and the technique equipment improvement.That requires finance organizations, especially commercial banks to take actions tosupport these enterprises to accomplish their renovation and then make positiveinfluences on the success of the State’s the policy Actually, to fulfill this mission, it

is necessary for banks to focus on improving the credit’s quality

There are three kinds of credit: short-term credit, medium-term credit andlong-term credit Based on theories learned and real situation of the society, I decide

to carry out a research on the ways to enhance the quality of medium and long-termcredit of Agribank – Huu Lung branch

2 Rationales

Agribank – Huu Lung branch was set up in 1998 Acknowledging the urgentrequirement of the new economic context, the branch has made a strongconcentration on its credit activities, especially the medium and long-term creditservices in order to well support enterprises and other organizations to complete theindustrialization and modernization process successfully So far, Agribank – HuuLung branch’s business always plays a leading part amongst banks belonging toAgribank – Lang Son province branch in developing the growth of the wholeAgribank system However, due to the tough economic situation as well as thecomplexity of the credit activity, the branch’s the lending activities cannot avoidunexpected credit risks and other limitations

During a short-term internship in Agribank – Huu Lung branch, the authorhas obtained a lot of valuable knowledge and practical experience Being full aware

of the importance of the medium and long-term credit toward the development inthe branch’s business, with the aims of studying the current situation regarding theeffectiveness of the medium and long-term credit in Vietnam Agribank in general

and Agribank – Huu Lung branch in particular, and then find out some solutions toincrease the quality of the medium and long-term lending activity, the author

decided to choose the following topic for this research paper: “Enhancing the

quality of medium and long-term credit in Agribank – Huu Lung branch”.

3 Research questions

This report was designed to analyze the real situation of the medium andlong-term credit service in Agribank – Huu Lung branch To be more specific, thestudy seeks answers to these following questions:

a Which criteria should be chosen to assess the quality of the medium andlong-term credit activity?

b Which factors have influence on the quality of the medium and long-termcredit activity?

c How effectively did Agribank – Huu Lung branch perform its mediumand long-term credit activities during the period between 2010 and 2012?And what are the reasons behind some existing shortcomings?

d What can be the recommendations for Agribank – Huu Lung branch toperfect its credit service?

4 Scope of the research

The research paper will cover the following contents:

 Determining the criteria to assess the quality of the medium and long-termcredit activity

 Identifying factors affecting the quality of the medium and long-term creditactivity

 Describing and analyzing the real situation of the medium and long-termcredit activities in Agribank – Huu Lung branch within three years (from

journals and online resources to gather practical information for the report.

b Designs

About the types of the research, descriptive research design and casualresearch design are united to assess the quality of the medium and long-term creditservice in Agribank – Huu Lung branch

At first, the author uses the descriptive method of research to illustrate theoutstanding features in the current situation of the medium and long-term creditservice in Agribank – Huu Lung branch

Secondly, the author applies casual research method to analyze the reasonsfor some existing limitations of the medium and long-term credit service inAgribank – Huu Lung branch

With the combination of these two methods, the author can obtain a deepunderstanding about the topic as well as cultivate the own knowledge of themedium and long-term credit service

CHAPTER I: INTRODUCTION

1.1 Introduction of Agribank – Huu Lung branch

1.1.1 History of establishment and development

Agribank – Huu Lung branch that has been belonged to Agribank – LangSon province branch and also a member of Agribank Viet Nam has started itsbusiness up since October, 1998

It can be seen that, this period of the bank’s establishment is a sensitive point

of the national economy in which all enterprises had to deal with consequences ofwars as well as respond the Party’s renovation policy Additionally, there were a lot

of social problems after wars emerging which increasingly caused piggledy situation in all aspects

At the beginning, the Bank faced up with a lot of difficulties includingblocked business activities of local enterprises and co-operatives, stagnatingproduction activities, slow cash flow, imbalance between revenues andexpenditures, cumbersome organizational structure Moreover, small capitalresource and high ratio of overdue outstanding loans were also troubles that itconfronted at the starting point

In term of organizational system and human resource, the large number ofstaff along with the small percentage of skilled workers was issues that wereprioritized to be solved at first In detailed, the Bank had to cut the number ofofficers down by 42.8 %, equivalent to 30 people (from 70 down to 40 people)

With respect to capital resource, it was required that the Banks had to changeits investment strategy and capital mobilization policy in order to run its businessand keep itself alive in the market Specifically, Agribank – Huu Lung branch had

to actively widen its business scale following the rule “borrowing to lending” andpublish some marketing strategies to appeal customers to send their money to thebank so as to enlarge capital scale As results, capital mobilization has had positiveimpacts on capital scale, specifically increasing from only hundreds of million VND

to 160 billion of VND Because 95% customers of the bank were households andsmall business points, Agribank – Huu Lung branch had a lot of troubles indeveloping its business and Commercial Bank in general as well By June 1999, thebranch has made balance between revenues and expenditures and from then on, itsincome more and more has increased, thus it can guarantee salary delivery for staff

on time with suitable levels following Vietnam Bank for Agriculture and RuralDevelopment’s rules.

1.1.2 Organizational structure

Now, the branch consists of 50 staff, in which there are 49 regular membersand 1 contract worker The organizational structure is rather simple but theallocation staff into each position is still so appropriate as follows:

Figure 1: Organizational structure of Agribank – Huu Lung branch

(Source: Agribank – Huu Lung Branch Operations Centre)

In spite of the small number of staff and the simple organizational system,each position is still given specific assignments in order to keep the branch runsmoothly as well as gain high profit in its business.

Table 1: Functions of each level in the organizational structure

FUNCTIONS

Director

Actively set up business programs and plans, and operatebusiness activities under the control of industry, Agribank – LangSon city branch and the local authority’s regulations

Timely announce social welfares, circulars, instructions,and decrees, to officers in the branch and check-up the obedience

of these legal documents

Regularly take care of staff’s living condition, opentraining courses in order to improve their skills and qualifications

Receive, evaluate, and run lending projects and programs

of enterprises under regulations of State Bank as well as thesuperior Agribank

Frequently check-up and analyze borrowers, classifyloans, etc to prepare effective solutions to recover loans

Make periodical sale reports or reports followingmanagers’ directions

Fulfill other functions when assigned

Accounting

Department

Establish service transactions with customers includingpaying savings, collecting cash flows and ensuring customerprofile’s security

Check-up and supervise the obedience of social welfares,accounting regulations and procedures following the control ofthe banking industry and the State

Strictly comply with regulations on budgets and generalaccounting operations in order to detect and revoke counterfeitmoney, and keep budgets in safety

Buy fixed assets and do other assignments.

Appraise the reality, reliability of management andfinance data as well as information system and electronicservices

Look over and assess the conformity to laws and thebank’s internal rules

Recommend solutions to resolve mistakes and improveinternal inspection system and risk management system in thebranch

(Source: Administration and Human Resource Department Agribank – Huu Lung branch)

1.1.3 Functions and missions

Being as a member of Vietnam bank for agriculture and rural development,Agribank – Huu Lung branch is given the following assignments:

- Mobilize capital from VND and foreign currency in various forms ofopening deposit accounts, issuing certificates of deposit, bonds and othervaluable papers

- Give medium and long term credits towards organizations, individuals,households from all sectors

- Trade foreign exchange by raising, lending, trading, international paymentand making other foreign exchange services in foreign exchange marketfollowing the management policy of the Government, the State Bank andVietnam Bank for Rural Development

- Issue business services including collecting cash, buying and selling gold,setting up automatic teller machines, issuing credit cards, keeping valuable

- Keep capital resources in balance and regulate it amongst other branches

in Lang Son province

- Run investment projects with enterprises in forms of buying shares ifallowed by the State Bank

- Carry out the payment and delivery income following regulations ofVietnam Banks for Agriculture and Rural Development

- Publish credit services meeting the poor’s demand

- Build up training plans and commendation strategies toward excellentindividuals as following rules of Vietnam Banks for Agriculture and RuralDevelopment

1.1.4 Several business results

 Capital mobilization:

Agribank – Huu Lung branch has received all kinds of money in form ofVND, foreign currency from both individuals and business organization withflexible interest rate Customers’ deposits are always insured according to theState’s regulations Through figures from financial report in the period between

2010 and 2012, the total of mobilized capital source slightly increases from 789billion VND to 862 billion VND Among elements of mobilized capital structure,VND often accounts for the majority; therefore, the increase in mobilized capitalsource means the surge in VND also

In term of structure of capital, there are some changes deposit balance fromenterprises and households Specifically, the deposit balance from enterprises rises

by 23.1% in 2012 compared to 2010, making its contribution to the total capitalsource also increase Besides, the deposit balance from households also surges moreslowly than that from enterprises The reason for these changes is thanks to creditofficers’ efforts in approaching enterprises and cleverness in encouraging thesecustomers to use the branch’s credit services It is not denied that during 3 years(from 2010 – 2012), the branch has made great contributions to the growth ofAGRIBANK

 Credit activity:

The branch’s credit activity has smoothly operated in the period from 2010

to 2012 The evidence for this is proven by the changes in the total of outstandingloans, outstanding loans in term of time payment, types of business, economic

sectors and bad loans ratio It is calculated that the total of outstanding loansdecreases from 815 billion VND down to 738 billion VND, respectively in 2010and 2012 The reason for this reduction is the tough competition in the market andespecially the bad effects of the crisis In the total of outstanding loans, short-termoutstanding loans have still taken up the majority because of the characteristics inbusiness of Huu Lung district It can be said that this is a difficult period for creditactivity of Agribank – Huu Lung branch and the whole banking system also.

 Customer services:

In recent years, Agribank – Huu Lung branch increasingly pays muchattention to customer services, thus wins customers’ trust Namely, the branch usesSWIFT system to do export-import goods payment, money transfer with otherbanks over the world quickly and safely Moreover, the branch also issues creditcards, especially encourages organizations to pay salary through banking accounts.Now, local people are familiar with using credit cards, money transfer services andfinance consulting services by phone All positive changes show that Agribankmore and more concentrates on developing customer services and actually receivesmuch more customers’ confidence

1.2 The key term definitions

1.2.1 Credit

Credit is a period of time allowed before a customer has to pay a debtincurred for goods or services and is also an amount entered in accounts to show adecrease in assets or expenses or an increase in liabilities, revenue or capital In

accounts, credits are entered in the right-hand column

“Dictionary of Banking and Finance (2003)”

1.2.2 Outstanding loan

An outstanding loan is the portion of the loan that has not been paid Aspayments are applied towards the loan balance, the amount outstanding decreases.The lower the interest rate, the faster the balance declines when payments are made.(http://www.ehow.com/facts_6885935_definition-outstanding-loans.html)

1.2.3 Overdue debts

Debts become delinquent when a consumer neglects to make previouslyagreed upon payments to a lender Delinquent debts often carry high fees and canresult in unpleasant telephone calls from debt collectors and legal difficulties It alsocan hurt an individual's chances of obtaining future credit cards and loans by

damaging his credit rating (ww.ehow.com/about_7547981_delinquent-debt)

1.2.4 Bad debt

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 reasonableefforts to collect it have been exhausted This usually occurs when the debtor hasdeclared bankruptcy or the cost of pursuing further action in an attempt to collectthe debt exceeds the debt itself (http://en.wikipedia.org/wiki/Bad_debt)

CHAPTER II: THEORETICAL FRAMEWORK

2.1 Overview of medium and long-term credit

2.1.1 Definition of medium and long-term credit

According to Lê Văn Tề (2009), based on the term to maturity of the loans,there are three types of credits: short-term credit, medium-term credit, and long-term credit While short-term credit is less than 1 year and used to add to thecontemporary shortage of current capital of enterprises, medium and long-termcredit can be understood as the kind of credit, which is extended for more than oneyear Therefore, medium and long-term credit may be considered as term loans Inthe book “Term Lending to Business” (1942:2) written by Neil H Jacoby andRaymond J Saulnier, “term loans” is defined as follows:

Term loans are credits extended to business concerns serves to differentiatethem from many other types of loans, also having terms of more than one year,which are made by commercial banks, insurance companies and other financialinstitutions Term loans are closely related to, but are to be differentiated from,purchases by banks of installment contracts arising from the sale of commercial andindustrial equipment

2.1.2 The role of medium and long-term credit in the market economy

2.1.2.1 With respect to the economy

In economies, a demand for the medium and long-term credit is regularlyrequired for the reason that all enterprises always nurture the hope of developingand broadening production’s scale, advancing technology and informationscience… Especially, with respect to Vietnam’s economy, there is now an urgentneed for basic construction Because of businessmen’s limited capital as well astheir hesitating investment psychology, the source of capital directly invested inenterprises mainly originates from banks’ support (Tín dụng ngân hàng, 2009, LêVăn Tề)

For a long-time research, Shin-ichi Fukuda also summarizes the role ofmedium and long-term credit to the economy in the “Working paper No 77 (2001)”

as below:

From the macroeconomic viewpoint, the allocation of medium and long-termfunds is warranted, if the allocated medium and long-term funds had great externaleffects in increasing capital stock and production The ratio of medium and long-

term loans has positive effects on investment in the economy that has a potentialliquidity risk in the financial market When there is a possibility of a liquidityshortage, the firm’s investment decision tends to be conservative Thus, to theextent that the medium and long-term debt makes the liquidity shortage less likelyoutcome, medium and long-term loans can have a positive impact on investment Moreover, effective medium and long-term credit may make a positiveinfluence on all fields including economics, politics and society as well as all people

in society When the process of production develops at a higher speed, there are alot of changes such as a considerable increase in enterprise’ capital, social welfareinsurance, a noticeable reduction in the unemployment rate, and the greatimprovement in living condition of people from all walks of life Actually, this kind

of credit makes contributions to restructuring the investment capital, streamliningthe economy and then keeping the society in order and safe

2.1.2.2 With respect to enterprises

Nowadays, it is believed that the medium and long-term credit isincreasingly preferable in business thanks to its conformity with limited liabilitycompanies and enterprises’ economic condition In the competitive economiccontext, to be able to exist and develop, enterprises are under compulsion to invest

in fixed assets incessantly One of the primary reasons for that is fixed assets areconsidered as the major material in production, the important part in the total costprice as well as the key factor in deciding competition advantages Nevertheless, infact, the value of fixed assets is usually very huge If only depending on self-accumulated capital, enterprises must spend lots of time on renovating fixed asset

In consequence, the sole solution for enterprises is to borrow for renovation

Studying the role of medium and long-term credit, Lê Văn Tề (2009) makes

a comparison of the medium and long-term credit with “an efficient assistant” ofenterprises in order that they can chase up their opportunities such as widening theproduction scale, increasing productivity and finally controlling the market One ofits strong points is clear that medium and long-term credit is more flexible thanother methods of long-term capital mobilization like bonds and stocks Whenborrowing medium and long-term loans, enterprises can run their businessactivities, set up lots of important projects in active way instead of have to assignthe influence before do these work as when issuing shares Additionally, withmedium and long-term loans, enterprises have a firm grasp on maturity date so as to

accomplish their repayment mission towards banks vigorously Thus, “medium

and long-term credit is an effective tool supporting enterprises to achieve profit targets safely when enterprises are in short of capital resource.”

(bankofbaroda.com/bbs/smemedtermloans.asp)

2.1.2.3 With respect to banks

“Medium and long-term credit is both an attractive source of profits and an effectively competitive tool among banks” (voer.edu.vn)

Medium and long-term credit brings a great amount of profits and enhancesbank’s competition in commercial bank system Consequently, it can be supportedthat enhancing the number and the quality of medium and long-term credit isconsidered as a strategic action for all banks’ development

When banks sign contracts with their customers for lending the amount ofmedium and long-term loans, that banks would like to build up relationships andkeep in touch with their customers for a long time in future Furthermore, mediumand long-term credit is also an effectively competitive tool amongst banks, whichhelp banks draw customers’ attention toward their services Actually, when banksget on well with their customers, they certainly earn customers’ trust and then easilypersuade them to use the banks’ other services

2.2 Criteria to assess the quality of medium and long-term credit

2.2.1 Overdue debt ratio

Mr Rose (2004) supposes that the overdue debts will occur when the termfor repaying debts and interests terminates but the borrower cannot repay debts andinterests on time Overdue debt is a situation that not all banks expect For thatreason, banks always make every effort to minimize overdue rate as low as possible.Decision No 493/2005/QD-NHNN dated April 22, 2005 issuing theRegulations on Classification of Debts and Loans Provisioning in BankingOperation of Credit Institutions under which bank loans are classified into fivecategories, which is primarily based on the period that payments of principal andinterest are overdue:

Category 1 (pass): debts that are not due and the borrower is able to pay theprincipal and interest of debts in full and in a timely manner

Category 2 (special-mention): debts that are overdue less than 90 days andrescheduled debts that are not due

Category 3 (sub-standard): debts that are overdue from 90 to 180 days and

rescheduled debts that are overdue less than 90 days.

Category 4 (doubtful): debts that are overdue from 181 to 360 days andrescheduled debts that are overdue from 90 to 180 days

Category 5 (loss): debts that are overdue more than 360 days, rescheduleddebts that are overdue more than 180 days and debts that are subject to reschedulingarrangements as directed by the Government

Debts in category 3, category 4, and category 5 are considered as bad debts

Generally, the amount of overdue debt is shown as overdue debt ratio:

Overdue outstanding loan

Overdue debt ratio = x 100%

Total outstanding loans

In the above equation, the overdue debt is a rest of loans, which have notbeen repaid to the banks; total outstanding loans are the amount of money, whichthe bank pumps into the economy for a period of time (Peter S Rose, 2004)

In terms of bank credit service, the safety is the deciding factor to build upthe credit quality When customers cannot fulfill their debts, immediately the debtturns into the overdue debt with higher interest rates It is actually assumed that thehigher the overdue debt rate is, the lower the credit quality is

2.2.2 Income from credits

In fact, it can be affirmed that the credit quality will not be high if banks donot get any profit from their credit activities, which is an important condition forbanks’ survival and development It means that the safety level of credit will behigh when the banks can cover the entire loans and interest as well

Profit from credit activities

Income from credit activities =

it helps to enhance banks’ profitability

2.2.3 Credit capital turnover

This criterion is often used to evaluate the ability to manage the credit capital

and the credit quality with respect to satisfying customers’ need

Total outstanding loan

Credit capital turnover =

Outstanding loan average

In the above equation, total outstanding loans are the amount of money,which the bank pumps into the economy for a period, and the average of theoutstanding loan is calculated in a year

This index also reflects the number of turnover of credit capital It is ceartainthat the higher credit capital turnover is, the faster banks’ credit capital turnoverruns and also the more money banks lend in the production proccesses and thegood flows In spite of only the amount of fixed capital, banks still meet enterprises’credit needs and use the rest to pump into other areas thanks to the flexible turnover

of credit capital In point of fact, the bigger the value of this indicator is, the betterthe quality of credit and credit capital management will be (Peter S Rose, 2004)

2.3 Factors affecting to the quality of medium and long-term credit

2.3.1 Factors from banks

2.3.1.1 Lending strategy

In reality, each bank sets up its lending strategy with a wide range of creditmethods When publishing the lending strategy, banks’ managers carefully considerwhether the strategy’s content matches with Government’s society and economydevelopment policy and also whether interests of depositors and borrowers is inharmony with that of banks With the great lending policy, credit staff will easilydetermine that loans is safe and effective or not Moreover, banks can earncustomers’ trust, ensure the profitability and decrease the risks In consequence,banks should buid up one suitable credit policy at first and then determine theeffective methods of capital mobilization and catital usage

2.3.1.2 The capability of the capital source

What the mobilized capital plays an important part in enhancing the quality

of credit means that the number of lending activities will increase if banks has lots

of capital Moreover, the term of the mobilized capital also has a great influence onthe term, sale and income from loans

 Capital mobilizing situation

Medium and long-term capital source is the main source in medium andlong-term credit services The larger the amount of mobilized capital is, the bigger

banks’ capability to supply big-scaled projects with credit services and improvingevaluation activities’ scale will be If the term of the mobilized capital source isshorter than that of loans for customers and there is no source for offset, theliquidity risk is inevitable Additionally, in the context of the unstable interest rate,interest rate risks can easily occur if the term of capital is not suitable for that ofloans

 Equity capital

Nowadays, to ensure the safety of banks’ credit activities, law on creditorganizations defines the limit to the amount of loans for each customer and relatedgroups based on the equity capital It can be approved that the equity capital has abig impact on banks’ ability to extend credit activities, and actually becomes adecisive factor in the amount of mobilized capital as well as income from creditactivities Therefore, increasing the amount of the equity capital gives greatmeaning to medium and long-term credit quality improvement

2.3.1.3 Lending procedure

There are three steps for a complete credit process, namely preparation forlending, disbursement for customers and debt recovey and processing Preparationfor lending is the first step in which the credit quality will be somewhat ensuredthanks to evaluation of customers and regulation on conditions and procedures forloans of each bank After customers’ credit profiles are approved, banks will startdistursement process for customers During and after this step as well, banks willinspect customers’ capital use, which can help banks keep close control of loans Infacts, banks will easily build up an effective risk prevention system and thenprogress the credit quality if they can suitably select and effectively apply checkingmethods to this step The last step is debt recovey and processing, which is the mostimportant one in deciding banks’ existence It is totally accepted that the lendingquality will be higher if banks timely detect customers’ bad situations and takeopportune measures to decrease the number of non-performnace debt situations.Clearly, good coordination between the above steps saves time on the lendingprocedure, accelerates credit capital turnaround, minimizes the credit risk situationand finally better the credit quality

2.3.1.4 The quality of human resource

The quality of human resource and personel management have effects on allaspects of banks, of course, including lending activities It is clear that the role of

credit officers depends on the scale and personel management of banks In smallcommercial banks, credit staff can work as private lenders, debt collectors,marketers, loan checkers, etc In context of increasingly developing economy, acredit officer have to deal with lots of work relating many fields as well as manykinds of customers, so the quality of lending activities directly relies on the quality

of recruiment and skill training, education and morality training and organizationalstructure arragement It can be said that credit staff is the decisive factor in thesuccess of the credit activity

2.3.2 Factors from customers

2.3.2.1 Customers’ capacity

Banks’ income is partly earned from a part of enterprises’ profit in form ofincome for loan As a result, production effectiveness of customers plays a key role

in deciding the medium and long-term credit quality

Because of customers’ great importance in managing loans, banks needevaluate the capacity of customers exactly before signing lending contracts Thefirst thing is capacity for markets which is shown by goods’ quality, price and lifecycle and enterprises’ status in markets When getting a good knowledge ofcustomers’ capacity for markets, banks can simply evaluate these goods’ advantagesand disadvantages in markets and then decide their lending activities towardenterprises Next is capacity for finance that represents the level of financeautonomy It means that an enterprise with a good finance capacity can easily earnbanks’ trust in ensuring the quality of lending activities, which motivates banks tocontinue signing medium and long-term credit contracts with enterprises Finally,that is customers’ capacity for management Management level, in general, oftenmakes great contributions to the success of an enterprise; thus enterprises with goodorganizational structures can certainly get more profits than ones with disorderedstructures It proves that the higher the level of management is, the more easilyenterprises can fulfill loans for banks

2.3.2.2 Customers’ reputation

Banks’ staff can identify customers’ reliability by investigating businessrelationships between customers and economic institutions Indeed, reputation hasmuch effect on banks’ interaction with customers, which is an important basis forbanks to consider signing contracts with individuals or enterprises Moreover, it canaffect banks’ gaining benefits and collecting debts if banks and customers are