LV Thạc sỹ_Improving credit activities for the poor at vietnam bank for social policies

NATIONAL ECONOMICS UNIVERSITYFACULTY OF FOREIGN LANGUAGES ENGLISH FOR BUSINESS DEPARTMENT ------IMPROVING CREDIT ACTIVITIES FOR THE POOR AT VIET NAM BANK FOR SOCIAL POLICIES-THAI BI

NATIONAL ECONOMICS UNIVERSITYFACULTY OF FOREIGN LANGUAGES ENGLISH FOR BUSINESS DEPARTMENT

- -IMPROVING CREDIT ACTIVITIES FOR THE POOR

AT VIET NAM BANK FOR SOCIAL POLICIES-THAI BINH BRANCH, QUYNH PHU TRANSACTION

OFFICE

BUSINESS ENGLISH DEPARTMENT

- -IMPROVING CREDIT ACTIVITIES FOR THE POOR

AT VIET NAM BANK FOR SOCIAL POLICIES-THAI BINH BRANCH, QUYNH PHU TRANSACTION

OFFICE

After a period of studying the theoretical framework and researching the

current situation in Viet Nam bank for social policies, Thai Binh branch, Quynh Phutransaction office, I have finished my report: “Improving credit activities for thepoor at Vietnam bank for social policies –Thai Binh Branch, Quynh Phu transactionoffice” It is my great pleasure to thank those who made this report possible Itwould be unfinished without support, contribution and great efforts of relatedpeople

Foremost, I would like to thank the teachers of Faculty of Foreign Languages,National Economics University for their highly valuable knowledge imparted to usfor the past 4 years It is the important foundation supplying me with sufficientknowledge to carry out this research

Next, I would like to express my great gratitude to my supervisor, M.A … forher precious guidance as well as encouragement in the writing of this report Withher support, I can deeply understand about the subject and the related theory as well

as the steps to fulfill my internship report She has spent time providing me withknowledge about credit and valuable references

My grateful thanks also go to Quynh Phu transaction office’s Director and itsentire staff for their useful help and guidance as well as the practical knowledgethey provided me during the time I intern at their office Without their facilitation,assistance and suggestions, this report would not be finished successfully

Last but not least, I am very grateful to my parents and friends for allinvaluable encouragement and support during my lifetime They always stand by

my side and motivate me to complete my report With all my heart, I wish all ofthem health, happiness and success in life

TABLE OF ABBREVIATIONS

ARD- SPS The Addendum for the Agreement of the Agriculture and

Rural Development Sector Program Support ESCAP Economic and Social Commission for Asia and the Pacific ODA Official Development Assistance

VBSP Viet Nam Bank for Social Policies

TABLES OF FIGURES

Table 3.1: Results of capital mobilization over the years 2008-2012 24

(Unit: Million VNĐ) 24

Table 3.2: Outstanding loans under the programs 25

(Unit: Million VNĐ) 25

Table 3.3: Evolution of outstanding loans through the socio-political organizations (Unit: Million VNĐ) 27

Table 3.4: Results of financial activity over the years 2010 – 2012 28

(Unit: Million VNĐ) 28

EXECUTIVE SUMMARY

In response to economic development needs in Vietnam in general anddevelopment of poor households in particular, credit services have become not onlymore diversified in quantity, but also better in quality In reality, credit for the poor

is always one of significant services contributing to the economic achievements inrural areas

During my internship at Quynh Phu Transaction office, Bank for socialpolicies in Thai Binh province, I have gained some knowledge of credit services forthe poor and realized how important it is in supporting local household’sproduction As a result, based on primary theories as well as practical activities ofthe Office, the topic “Improving credit activities for the poor at Vietnam bank forsocial policies –Thai Binh Branch, Quynh Phu transaction office” was chosen as myinternship report

This report is supposed to analyze the current situation of credit for the poor atthe Transaction office, then point out some achievements and limitations of theOffice in implementing this service Finally, based on the shortcomings, the thesissuggests some solutions to maximize the Transaction office’s credit services for thepoor

Apart from the introduction and conclusion, the report is divided into fourmain chapters:

Chapter 1: Introduction: In this chapter, a brief view of Quynh Phu Transactionoffice’s establishment, organizational structure, functions and mission is interpreted Chapter 2: Theoretical framework: This chapter will provide readers with anessential background related to credit and credit for the poor

Chapter 3: Analysis and Findings: This main chapter will deal with analyzing

of the figures and assessment of the Office’s current status At the same time,limitations and shortcomings of the entity will be figured out

Chapter 4: Recommendations: The final chapter is supposed to give somesolutions to improve and promote some extent credit services for poor households atthe Transaction office

TABLE OF CONTENTS

TABLE OF ABBREVIATIONS i

TABLES OF FIGURES i

EXECUTIVE SUMMARY iii

INTRODUCTION 1

CHAPTER I: INTRODUCTION 4

1.1 Introduction of Quynh Phu transaction office 4

1.2 Main activities at the bank 5

1.3 Key term definition 6

CHAPTER II: THEORETICAL FRAMEWORK 8

2.1 Poverty in Viet Nam 8

2.1.1 Conception of the poor 8

2.1.2 Causes of poverty 9

2.1.2.1 The poor 9

2.1.2.3 The natural and social environment 10

2.1.3 Consequences of poverty 11

2.1.4 Necessity of supporting the poor 12

2.2 Credit for poor households 13

2.2.1 Conception of credit 13

2.2.3 Characteristics and the role of credit for poor households 14

2.2.3.1 Characteristics 14

2.3 Effectiveness of credit for poor households 16

2.3.1 Economic effect 16

2.3.2 Social effect 17

2.4 Criteria for evaluating effectiveness of credit for poor households 17

2.4.1 In economic terms 17

2.4.2 In social terms 18

2.5 Factors affecting efficiency of credit for poor households 18

2.5.1 External factors 19

2.5.2 Internal factors 20

CHAPTER III: ANALYSIS AND FINDINGS 21

3.1 Current situation of credit for poor households at the bank 21

3.1.1 Current poverty situation at Quynh Phu District 21

3.1.1.1 Distribution of poverty in Quynh Phu District 21

3.1.1.2 Causes of poverty in Quynh Phu District 22

3.1.2 Lending policy to poor households at the bank 22

3.1.3 Lending activity for poor households 23

3.1.3.1 Funds over the years (2008-2012) 23

3.1.3.2 The lending activity 24

3.1.4 Results of financial activities 28

3.2 General assessment on credit efficiency for the poor at the bank 29

3.2.1 Achievements 29

3.2.1.1 Economic efficiency 29

3.2.1.2 Social efficiency 30

3.2.2 Limitations 31

3.2.2.1 The organization 31

3.2.2.2 Lending activity 31

3.2.2.3 Financial operation 32

3.2.3 Causes of limitations 32

CHAPTER IV: RECOMMENDATIONS 34

4.1 Operating orientation of the bank in the coming years 34

4.2 Some solutions to the effective improvement of credit for the poor at the bank 34

4.2.1 Complete network 35

4.2.1.1 The savings and credit groups 35

4.2.1.2 The outlets in the local area 35

4.2.2 Further promote efficiency of entrusted loans through socio-political organizations 36

4.2.3 Coordinate with local authorities 36

4.2.4 Strengthen marketing activities 37

4.2.5 Promoting capital resources to expand investment 37

4.2.6 Guide poor households to know how to do business 38

4.2.7 Enhance staff capacity and professionalism 38

4.2.8 The other solutions 39

4.3 Recommendations 39

4.3.1 For the government 39

4.3.2 For the district authorities 40

4.3.3 For the central bank 40

REFERENCES 1

REFERENCE

APPENDIX

INTRODUCTION Introduction of research topic and rationale

After more than 20 years of innovation, the economy in Viet Nam has gainedimportant achievements People's living standards are improved increasingly Thepolicy is maintained stably However, the negative side of the development isincreasingly urgent, including a big gap between the rich and the poor, seriousunemployment, environmental pollution and waste of natural resources Today,millions of poor households in Vietnam, especially in the poor and remote areas donot enjoy the fruits of development The poor are lost before global integration and

in the light of the civilized world The above weaknesses are causes of social andpolitical instability in a society striving for the ideal of prosperous people, a strongcountry, democratic and civilized society

Before this current situation, the State is also interested in poverty alleviationtasks There is no doubt that the poverty reduction strategy plays a vital role in thegrowth of our country It helps to enlarge the scale of economic production, takeadvantages of human resources and enhance the standard of life Due to its essentialroles, poverty reduction always obtains the care from the government, especiallyfrom the banks In reality, the demand for capital to develop and expand theirbusiness and production is quite large Therefore, it is necessary to broaden thecapital investment for this small-size economic sector at local level to make the bestuse of potential resources in the local

Credit for the poor is one of the bank’s services to support individuals andhouseholds who have disadvantaged conditions With this banking policy, they canoften obtain loans that make it possible to sustain their production as well asencourage them run their own businesses However, the current unstable economicconditions along with existing limitations in the bank’s policies and orientationshave affected the effectiveness and expansion of credit for the poor in someprovinces in general and in Thai Binh in particular Moreover, there are somedifficulties in widening lending capital for poor households due to small andinterrupted loans, implementation costs, potential risks affected by natural disasters

Being aware of the significance of strengthening and expanding creditactivities for the poor at Quynh Phu Transaction Office to support local households,

I spent a lot of time during my internship on researching and collecting data aboutthis issue then I decided to choose the following topic for my internship report:

“Improving credit activities for the poor at Vietnam bank for social policies – Thai Binh Branch, Quynh Phu transaction office”.

Research questions

The following questions will be answered respectively in the report:

1 What is the current reality of credit for the poor at Quynh Phu Transaction Office?

2 What should be done to improve credit activities for the poor at Quynh PhuTransaction Office?

Scope of the research

The thesis mainly deals with:

• Exploring the significant role of credit for the poor in local economicdevelopment

• Analyzing figures and data relating to credit performance for the poor atQuynh Phu Transaction Office

• Describing the Office’s current situation of credit for the poor

• Evaluating the effectiveness of credit and pointing out its limitations

• Suggesting some solutions to improve the Office’s credit service for the poor

Methodology

To carry out this study, the researcher has applied quantitative methodologyand data analysis The data for this research include primary data and secondarydata Firstly, the process of gathering primary data is conducted through theinternship period at Quynh Phu Transaction Office Thanks to the bank’s accessibledocuments and staff’s help, the researcher is offered with statistics related to thetopic The data will be presented in forms of tables In addition, observation alsohelps the researcher gain more real experience and understanding of credit activities

as well as their effectiveness Secondly, a great number of secondary data arecollected from reference books on economics, finance and international trade Such

books provide a review of reliable theories In addition, online sources also offeruseful information bringing the research topic to light.

CHAPTER I: INTRODUCTION 1.1 Introduction of Quynh Phu transaction office

For requirement of integration roadmap, banking restructuring separatespreferential credit from commercial credit to create favorable conditions forcommercial banks to expand markets for integration into regional and internationaltrade On March 11th 2003, VBSP officially participated in the banking system ofVietnam and operated policy credit with a specific banking model of providingpreferential credit for beneficiaries mandated by the Government Located in thesystem of VBSP, Quynh Phu transaction office of Thai Binh branch officially putinto operation in 2003 The Chairman of People's Committee decided to establishthe administration board of the bank which managed by a district Deputy Chairman.Ten members in the Board are leaders of departments and mass organizations whoare responsible for managing and supervising all activities of the bank The bankrapidly forms a network consisting of 19 transactions in towns and coordinates withsocial and political organizations as well as entrusted unions to build the 334savings and credit groups

As a specific bank of the government, the bank has functions and dutiescompared similarities and differences with other commercial banks Specifically, ithas the following functions:

• Mobilize domestic and foreign capital, savings in poor communities

• Issue bonds guaranteed by the Government, deposit certificates and other valuablepapers; get loans from domestic and foreign financial institutions

• Receive, manage, use, and preserve government funding for programs to reducepoverty and other programs

• Receive the voluntary funds without interest or refund of individual economicorganizations, socio-political institutions, and non-governmental organizations inthe country and from abroad

• Provide short, medium and long term loans to support production, business and jobcreation; contribute to the national target program of poverty reduction and socialstability

• Get entrusted loan services from domestic and international individuals,organizations and countries through entrusted contracts.

To implement the task of the Government in the course of poverty reduction,since the establishment in 2003, Quynh Phu Transaction Office has been conductingthe policy credit channels for poverty alleviation such as the credit program for poorhouseholds VBSP's policy credit is considered as the effective policy gainingpopularity and meeting the necessary needs of the poor and other social policybeneficiaries The loan procedures have been simplified, helping the poor easilyapproaching preferential credit With the method of entrusted lending via massorganizations such as Women Union, Farmer Union, War Veteran Union and YouthUnion, the VBSP credit is much closer to the poor, improving capital deficiency forpoor households The loan size gradually increases, basically satisfying theborrowing needs of the poor The overdue debt rate is lower and lower

Thus, the branch has played an important role in contribution to the economicgrowth and stable society in Thai Binh The branch has reached great achievementsafter only a short time, seriously and creatively implemented the directions from theHeadquarters on the trust contracts between VBSP and socio-political organizationsfor lending to the poor and other policy beneficiaries

The bank has taken the transfer of total outstanding loans for the poor fromVBARD branch in Thai Binh, then switched to lend by partially trusting method viasocio-political organizations, establishing a system of savings and credit groups athamlets and villages as the branch’s “extended hand” It results in effectiveness,creating fair implementation of policy lending and ensures direct lending to theeligible beneficiaries The bad debt rate is minimized

Further built on the obtained achievements, the bank homogeneously executesand comprehensively reaches their defined goals, speeds up the funds rotating,increases the fund utilization factor so as to facilitate the poor and other policybeneficiaries to access the loans Exerting itself, the bank has effectively succeeded

in achieving the socio-economic development mission which was stated in theResolution of XIV Provincial Communist Party Conference

1.2 Main activities at the bank

Based on Decision of No.131/2002/QD-TTg of the Prime Minister, the bankmakes the transactions which are mobilizing domestic and foreign capital, savings

in poor communities; lending to the poor and other policy beneficiaries;implementing payment and fund services; managing government resources forcredit programs to reduce poverty and other programs; receiving entrusted fundsfrom local governments, domestic and international individuals and organizations Besides control of loans, the bank regularly inspects operation and coordinateswith social and political organizations to supervise loan management By doing so,

it helps savings and credit groups to identify strengths as well as shortcomings andhave timely reorganization to well perform loan management The bank is often incollaboration with social and political institutions to check their operation in thedisbursement and debt-interest collection time Loans safety management isconsidered as a key indicator of completion of the tasks Specifically, in 2009, thebranch manager advised the board of directors to establish 11 inspection teams for

40 communal associations, 344 savings and credit groups and 590 borrowers.Through examining funds management of leaders in mass organizations; savingsand credit groups, the existence in controlling capital is discovered, thus, solutionsare deployed to fix it up

1.3 Key term definition

Following are some key terms that will be frequently mentioned in the report:

Poverty means “The state of one who lacks a certain amount of material

possessions or money Absolute poverty or destitution refers to the deprivation of basic human needs, which commonly includes food, water, sanitation, clothing, shelter, health care and education Relative poverty is defined contextually as economic inequality in the location or society in which people live” (Instituto

Nacional de Estadistica, 2009)

Commercial bank means “Bank that offers a broad range of deposit accounts,

including checking, savings and time deposits and extends loans to individuals and business Commercial banks can be contrasted with investment banking firms, such

as brokerage firms, which generally are involved in arranging for the sale of

corporate or municipal securities” (Gretchen Morgenson & Campbell R Harvey,

2002)

Credit means “a contractual agreement in which a borrower receives something of

value now and agrees to repay the lender at some date in the future, generally with interest” (Mishler and Robert, 1995).

Outstanding loan means “the portion of the loan that has not been paid As

payments are applied towards the loan balance, the amount of outstanding is decreased The lower the interest rate is, the faster the balance declines when payments are made” (Campbell R Harvey, 2010).

CHAPTER II: THEORETICAL FRAMEWORK

2.1 Poverty in Viet Nam

2.1.1 Conception of the poor

The concepts of poverty are not significantly different among countries,

regions and population groups The commonly- used criteria to define poverty areincome or expenditure to meet basic human needs such as food, clothing, housing,health, education, culture, travelling and social communication The basicdifference is only high or low satisfaction; which depends on the level of socio-economic development as well as the customs of each region or each country

At the conference on the fight against poverty held by Economic and SocialCommission for Asia and the Pacific (ESCAP) in Bangkok, Thailand in January

2003, countries in the region have agreed and showed that poverty is a conditionwhere the population is unable to satisfy the basic human needs that depend on thelevel of socio-economic development, customs and habits of each region recognized

by the society

At the World Summit for Social Development, Copenhagen, March 1995,Governments came up with a more specific definition of poverty as follows: Thepoor are all those who have lower incomes below $1per day per person That isconsidered as the sufficient amount to purchase essential products to survive

In Viet Nam, according to Decision of the Prime Minister 09/2011/QĐ-TTGdated January 01st 2011 on the issuance of standard of poor households, border linepoor households in the period 2011-2015, promulgating standards of poorhouseholds, border line poor households to apply in the period 2011 - 2015 asfollows:

• Poor households in rural area have an average income of VND

400,000/person/month (from VND 4,800,000/person/year) or less

• Poor households in urban area have an average income of VND

500,000/person/month (from VND 6,000,000/person/year) or less

• Border line poor households in rural area have an average income from VND 401,000 to VND 520,000/person/month.

• Border line poor households in urban area have an average income fromVND 501,000 to 650,000/person/month

In conclusion, the poor can be simply considered as the people who do notsatisfy all the minimum basic needs of themselves, have lower incomes than theaverage standard of living of the population and lack opportunities to choose andparticipate in the community development process

2.1.2 Causes of poverty

According to Vietnam Open Educational Resources (VOER) assisted by TheVietnam Foundation (VNF), poverty results from many reasons including objectivereasons caused by the natural environment such as location, climate and soil;economy - society such as low educational level, custom of each nation, eachregion, state policy and reasons caused by the poor The reasons will be analyzed asfollows:

2.1.2.1 The poor

It can be said that a lack of capital for production is the main reason forpoverty Farmers who lack capital often fall into difficulties They have to work andborrow money in order to ensure their daily life It can be said that a lack ofproductive capital is the biggest hindrance to limit development of production andimprovement of lives for poor households

Besides, on account of backward farming methods rooted in the consciousness,subsistence production, and tendency to live in remote places inadequate of massmedia, the poor are not able to raise their awareness and apply scientific advancesinto farming Moreover, a shortage of production experience leads to lowproductivity and low efficiency

Other reasons are no practice of birth-control leading to families with manychildren under working age, no active seeking employment and suffering fromsocial evils On the other hand, consequences of the war bring out losing working

capacity of many people as well as deficiency in strong workers who can undertakehard work

2.1.2.2 Policies

Investment structure is irrational The rate of investment on agriculture andrural areas is low, mainly for irrigation The policies have not invested on potentialindustries attracting many workers, encouraged development of small and mediumenterprises Many subsidies such as interest rates of credit, subsidized price are notfor right objects, which adversely affect formation of the rural market

Additionally, economy reform policies with purpose of creating positivecompetition environment and trade liberalization bring out good incentives for theeconomy as well as encourage business development However, some industriesattracting many workers have not been focused yet Small and medium enterpriseswhich are capable of providing employment are not interested and developed Thelack of information, backward manufacturing equipment and low competitiveness

of products has made many small and medium enterprises go bankrupt, pushworkers into unemployment resulting in poverty

Moreover, transportation infrastructure in remote and disadvantaged areas isstill deficient State investment has not met big demand and resource contribution ofthe people has still limited Besides, the legal system is still incomplete andsynchronous Many legal documents which have not been timely and consistentlyissued caused many obstacles in the implementation process

2.1.2.3 The natural and social environment

Firstly, the poor are concentrated in areas with poor living conditions Themajority of poor people live in the mountainous and remote areas or rural areas.Due to volatility of the weather such as storms, floods and droughts, it makes life ofpeople and production condition more and more difficult Especially,underdeveloped infrastructure has made these regions are separated from otherareas

Secondly, the poor, ethnic minorities and particularly difficult objects oftenhave low education level, so they have few opportunities for good and stable jobs.Their incomes only ensure minimum requirement for life Consequently, they are

not eligible to improve education level and escape from poverty In addition, lowlevel of education affects decisions related to education or birth control which haveinfluence not only on the present generation, but also on the future generation Inaddition to the intellectual element, outdated customs and social evils such as drugtrafficking, indiscriminate mining or free migration are causes of poverty.

2.1.3 Consequences of poverty

The people living in poverty suffer disproportionately from hunger or evenstarvation, disease and lower life expectancy According to the WHO, hunger andmalnutrition are the single gravest threats to the world's public health andmalnutrition is by far the biggest contributor to child mortality Those who live inpoverty have also been shown to have a far greater likelihood of having or incurring

a disability within their lifetime Infectious diseases such as malaria andtuberculosis can perpetuate poverty by diverting health and economic resourcesfrom investment and productivity Here are some following consequences ofpoverty contributed by Phil Bartle, Sociology Professor, and Chief TechnicalAdviser for the Uganda Community Management Program:

Children from low-income housing circumstances are much more likely tosuffer from hunger, irritability, flu, and colds These illnesses could potentiallyrestrict a child or student's focus and concentration They are at a higher risk thanadvantaged children for retention in their grade, and even not completing their highschool education They often have far less success educationally than children wholive above the poverty line

Moreover, poverty makes people become grumpy It not only pushes somepeople to violence, but also corrupts relationships among people, especially in thefamily Poverty is one of the main causes leading to women violence Many SouthAsian women say that if the economic situation of the poor is improved, one of themost significant changes will be increased harmony in the family It also means thatfamily violence has decreased considerably

The political consequence is also equally important Poverty pushes peopleinto unequal relationships The daily hard living makes them have no more time to

a serious risk to the principles of individual freedom and the inalienable rights ofhuman.

2.1.4 Necessity of supporting the poor

Poverty is a common phenomenon of the market economy and objectiveexistence for each country in the developing process In particular, Viet Nam is inthe transition from a centrally planned economy to a market economy and from anextremely poor country to a middle-income country Therefore, poverty is not onlyinevitable but also serious It can be said that supporting the poor is an importantgoal of society Poverty reduction will limit social evils, stabilize social justice andcontribute to economic development Poverty support is with the purpose of thepoor’s livelihood, income generation, thereby increasing purchasing power andencouraging production development Therefore, the Communist Party of Viet Namhas proposed a basic point in the social development strategy that economicdevelopment, social stability and justice must be respected in order to pursue thegoal as “rich people, strong country, social justice, democracy, civilization”

In summary, supporting the poor is indispensable Stemming from reasons ofpoverty, it can be confirmed that although the country's economy can grow, thegovernment does not have its own policies and programs on poverty reduction, poorhouseholds cannot be out of poverty Consequently, the government has set outspecific policies to help the poor in order to narrow the gap between the rich andpoor Naturally, the government does not create the subsidy mechanism but createsopportunities for the poor based on the policies and solutions:

According to Decision No 20/2007/QD-TTg dated 05 February 2007 of thePrime Minister approving the national target Program on poverty alleviation, thegovernment investigates, captures the state of the poor; implements many policiessuch as job creation, communication and technology transference; buildsinfrastructure with small scale in poor areas, loans with preferential interest rates forpoor households and provides necessary information in order that the poor canreach the market and integrate into the community Every year, the governmentspends a significant portion of the total budget funding and expanding the nationalprogram on poverty reduction

Besides, the government also combines national target programs with othersocio-economic programs to reduce poverty such as: extension programs, industryand services development programs, programs for greening barren bare hills,especial supporting programs in difficult areas, population and family planningprograms and literacy programs Additionally, the government implements somepolicies to encourage and help the poor such as tax exemption, tuition fee remissionfor poor households that do not have ability to generate income, and mobilizingmass organizations, donors to help the poor under many different forms.

Another important solution is expanding international cooperation withgovernmental organizations and non-governmental organizations to help each otherfor resources and experience exchange However, developing credit repayment isregarded as one of the most effective forms of supporting the implementation ofpoverty reduction programs To know more about superiority of credit for the poor,

it should be necessary to look at the role of bank credit to the poor

2.2 Credit for poor households

2.2.1 Conception of credit

Ingham, G (2004) defined credit as the trust which allows one party to provideresources to another party where that second party does not reimburse the first partyimmediately, but instead arranges either to repay or return those resources at a laterdate The resources provided may be financial or they may consist of goods orservices This concept shows that credit does not necessarily require money It can

be applied in barter economies as well, based on the direct exchange of goods andservices

Mishler and Robert (1995) defined credit as “a contractual agreement in which

a borrower receives something of value now and agrees to repay the lender at somedate in the future, generally with interest.”

In general, credit relationship is mutual borrowing and repayment with theprincipal and interest in a certain period of time that has been agreed between theborrower and the lender In other words, credit is an economic category in which anindividual or an organization is given up the right to use a large volume or value to

etc In the context of the economy exists in parallel with production of goods, theexistence of credit is a necessity.

2.2.2 Conception of credit for poor households

According to Decree No.78/2002/ND-CP of October 4th, 2002 on credit forpoor people and other policy beneficiaries, credit for poor people and other policybeneficiaries means “the use of State-mobilized financial sources to providepreferential loans for poor people and other policy beneficiaries in service ofproduction, business, job creation and life improvement, thereby contributing to theimplementation of the national target program on hunger elimination and povertyalleviation, and social stability.”

It can be said that this kind of credit is only for the poor who have labor powerbut lack of capital to develop production The poor have to repay the principal andinterest in a certain time With the purpose of helping poor people to overcomepoverty quickly to integrate into the community, they can enjoy preferential interestrates differently according to each resource

2.2.3 Characteristics and the role of credit for poor households

2.2.3.1 Characteristics

According to Decree of the Government No 78/2002/ND-CP on credit for thepoor and other policy clients, credit for the poor operates under rules and conditionsthat differ from types of commercial bank credit

Firstly, the aim of credit is made non-profitably for the sake of helping thepoor with capital to do business so as to improve their living-conditions

Secondly, principle of lending is lending to the people who have labor abilitybut lack of capital for production and business They are determined according tostandards of poverty published by the government in each period Repayment (bothprincipal and interest) is made according to the agreed terms

Thirdly, lending conditions can be provided suitably in the actual situationwhich depending on capital resources, different periods and locations However,

one of the most fundamental conditions of credit for the poor is that when theyborrow money, they do not have to mortgage their property.

2.2.3.2 The role of credit for poor households

Of many reasons for poverty, the main one is due to lack of funds andknowledge to do business Capital, technology, business knowledge is the key toescape poverty Because of no capital, many people fall into a vicious circle.Working hard but not enough to eat makes the poor depend on loan sharking andpledge land to ensure minimum life every day However, the risk of poverty stillthreatens them regularly Therefore, when the matter of capital for the poor is solvedthoroughly, it will have practical effects

According to Vietnam Open Educational Resources (VOER) assisted by TheVietnam Foundation (VNF), it can be said that credit for the poor is the drivingforce to help the poor to overcome poverty In fact, the nature of farmers isindustrious, saving, but they are very poor due to lack of capital for production andbusiness Therefore, capital is a prerequisite as well as the first motivation to helpthem to escape from poverty With their industrious nature, when capital is giveninto the hands, it will help to increase incomes and improve their lives

Secondly, it helps the poor to improve their knowledge, have access to themarket, conditional production and business activities Besides, it supplies the poorwith capital investment targets for business to reduce poverty through creditchannel including principal and interest recovery This forces the borrower tocalculate to get high economic efficiency To do that, they have to learn, explore,and have creative production and accumulated experience Products exchanged onthe market give them access to the market economy directly

Thirdly, it contributes directly to restructuring of the rural agriculturaleconomy, implement social division of labor Through activities of investmentcredit for the poor, they directly contribute to restructuring of rural areas, scienceapplication to production, creating jobs and services in agriculture Moreover, theyparticipate directly in economic restructuring of agriculture and making labordivision in society

Finally, it provides capital for the poor to take part in building a newcountryside where create cohesion among members in organizations andassociations through conducting production techniques, economic familymanagement experience and borrowing activities With assistance of theorganization, credit will facilitate borrowers to help each other, strengtheningsolidarity and creating confidence in the Party and State As a result of economicdevelopment, it has changed rural economic life with social security, limiting thenegative side, creating new social and economic life in rural areas.

2.3 Effectiveness of credit for poor households

According to the 2008-2010 report on resource approaching of ruralhouseholds in the ARD- SPS program of Royal Embassy of Denmark in Vietnam,credit effectiveness is considered as a synthetic concept containing comprehensivemeanings of politics, economics, and society Effectiveness of credit for the poor issatisfaction of demand for the use of capital between the bank and the borrower aswell as economic and social benefits obtained to ensure existence and development

of the bank Thanks to the credit effectiveness, living conditions of poor people areimproved remarkably

2.3.1 Economic effect

Credit for the poor helps them to be out of poverty After the process ofpoverty reduction, the poor will have much better life; income levels above thepoverty line, and are capable of reaching up to integrate into the community It alsocontributes to poverty rate reduction, job creation; addressing relationship betweencredit growth and economic growth

Importantly, it helps the poor to define their responsibilities in relation toborrowing, encourage them to use capital to business goals and generate income torepay the bank Through the use of capital in the business and production, economicmanagement skills of borrowers are improved The poor have access to advancedcultivation techniques and new scientific invention

2.3.2 Social effect

Credit for poor households contributes to build a new countryside, change rurallife; social order and safety, and limit negative aspects It creates cohesion amongmembers in organizations and associations through conducting productiontechniques, economic family management experience and borrowing activities.Moreover, preferential lending policy shows humanity and communityresponsibility for poor people; participates in strengthening alliance which isreflected good nature of socialist regime in Vietnam

It can be showed that credit for the poor also contributes to the goal of povertyreduction-a major policy of the Party and State For the bank, it enhances prestige ofsocial policy banks and gradually expands openness, democracy and popularity inthe bank's lending activities

2.4 Criteria for evaluating effectiveness of credit for poor households

Based on the 2008-2010 report of the ARD-SPS program of Royal Embassy ofDenmark in Vietnam, effectiveness of bank credit is generally evaluated inconnection with benefit of 3 following objects: customers, the bank and society-economy In this research, I would like to make a deeper evaluation of theeffectiveness of credit for the poor

2.4.1 In economic terms

Firstly, the effect of bank credit to the poor is reflected in the number of loans,repayment (principal and interest) on time, low delinquency rate, and low risk inusing capital If households use capital for the right purpose, repay (both principaland interest) on time for the banks, not meet the risk of loss of capital and get profitafter deducting costs, the capital is used effectively

Secondly, the effectiveness is expressed through the poor know how to usecapital to do business If poor households get loans to do business conveniently andsell high-profit goods, they are still profitable after deducting wages for workers,bank repayment (both principal and interest); it is considered as using capital withhigh efficiency

Thirdly, the number of out of poverty households becoming the rich is one ofimportant criteria to evaluate effectiveness of credit to the poor Householdsescaping from poverty line are the ones whose income per capita is higher thancurrent poverty standard and are no longer on the list of poor households made bythe Department of Labor, Invalids and Social Affairs in districts and cities everyyear.

Finally, the effectiveness depends on the rate of getting loans: This isevaluation criterion in terms of quantity in activities of credit The higher the rate is,the greater credit funds to serve poverty are; on the other hand, this rate evaluatesthe poor’s big ability of production and effective capital using (if inefficient use ofcapital, the poor will not need to borrow)

2.4.2 In social terms

Through poverty lending, it has created conditions for members of poorhouseholds to have stable jobs and more wealth for the family and society,contributing to limited social evils, political order stability and social safety Poorhouseholds who use credit sources; especially bank credit, can remove usury Thathelps to change the face of rural life as well as people’s life From that, people'strust in the Party and the State and the government’s interest to the poor isincreasingly consolidated

Besides, if credit efficiency becomes higher, the bank will have moreconditions to better serve borrowing needs, which will contribute to promotingeconomic and social development in the local Through lending activities, theoperation of associations is held more abundantly and more and more participantstake part in organizations

2.5 Factors affecting efficiency of credit for poor households

Currently, credit efficiency of the bank is being considered to improve in thebest way To manage and take solutions to credit efficiency, it is required that wehave deep understanding of the affecting factors There are many factors affectingthe credit efficiency of the bank In accordance with the 2008-2010 report onresource approaching of rural households in the ARD program of Royal Embassy ofDenmark in Vietnam, they can be classified into following groups