Expanding small and medium enterprise loans in transaction office 1 bank for investment and development of vietnam JSC

First: Systematize the basic theories of SME loan extension in commercial banks. The thesis also outlines the factors that influence the expansion of SME lending by commercial banks Second: Analyze the current status of SME loan extension in BIDV Branch Transaction Center 1. From there, draw out the problems that need to be addressed and the causes that affect the open work. BIDVs Small Business Loans Branches of Transaction Center 1 Third: The thesis proposes some solutions and recommendations to expand SME lending activities at BIDV Branches of transaction offices 1. The solutions are scientific and feasible for the expansion of SME lending in BIDV Branch Office 1.

ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH

-

NGUYỄN XUÂN QUÂN

EXPANDING SMALL AND MEDIUM ENTERPRISE LOANS IN TRANSACTION OFFICE 1 BANK FOR INVESTMENT AND

ĐẠI HỌC QUỐC GIA HÀ NỘI KHOA QUẢN TRỊ VÀ KINH DOANH

-

NGUYỄN XUÂN QUÂN

EXPANDING SMALL AND MEDIUM ENTERPRISE LOANS IN TRANSACTION OFFICE 1 BANK FOR INVESTMENT AND

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: TS NGÔ VI DŨNG

HÀ NỘI - 2019

DECLARATION

The author declared that all research findings were mainly obtained during his own study and research, which has not been published in any others' research programs

Other research results and documents used in this thesis had been allowed by their original authors with given credits

He is fully responsible to the Board for thesis defense, the Faculty of Business Administration and the law for the above declaration

HANOI, MAY 15 2018

ACKNOWLEDGEMENT

The author would like to express his sincere thanks to the enthusiastic and effective guidance and support of Ngo Vi Dung during the process of doing research and completing the thesis

The author also expresses his gratitude to all teachers of Faculty of Business Administration, Hanoi National University for their dedication to teaching and transferring knowledge

Last but not least, the author would like to express his sincere thanks to the Board of Management and other related departments and branches of Transaction office 1 - Bank for investment and development of Vietnam JSC has facilitated and assisted the author in the process of completing this thesis

Hanoi, May 15 2018

Author

Nguyen Xuan Quan

TABLE OF CONTENT

LIST OF ABBREVIATION i

LIST OF TABLES ii

LIST OF FIGURES iii

INTRODUCTION 1

Chapter 1: FUNDAMENTAL ISSUES OF EXPANDING SMALL AND MEDIUM ENTERPRISE LOANS 6

1.1 Overview of commercial bank 6

1.1.1 Overview of commercial bank 6

1.1.2 Basic activities of a commercial bank 8

1.2 Overview of small and medium enterprises 11

1.2.1 Small and medium business concept 11

1.2.2 Characteristics of small and medium enterprises 12

1.3 Commercial banks' lending activities for small and medium enterprises 14

1.3.1 The concept of small and medium business loans 14

1.3.2 Forms of lending to small and medium enterprises 15

1.4 Expand lending to small and medium enterprises of commercial banks 17

1.4.1 The concept of lending extension for small and medium enterprises of commercial banks 17

1.4.2 Aims of expanding small and medium enterprise loans 18

1.4.3 The contents of expanding small and medium enterprise loans 19

1.4.4 The criteria reflect the expansion of SME lending in commercial banks 25

1.4.5 Factors affecting the expansion of commercial bank lending to small and medium enterprises 28

Chapter 2: REALITY OF EXPANDING SMALL AND MEDIUM ENTEPRISES LOANS IN BIDV – TRANSACTION OFFICE 1 32

2.1 Overview of the formation and operation of BIDV – Transaction office 1 32

2.1.1 Establishment and development of BIDV – Transaction office 1 32

2.1.2 Business Performance of BIDV - Transaction Office 1 33

2.2 Reality of expanding SMEs loans in BIDV - TO1 42

2.2.1 General introduction about SMEs - customers of BIDV - TO1 42

2.2.2 Status of SME loan extension at Vietnam Development Bank - Branch of the Transaction Center for the period of 2015 - 2017 45

2.3 Evaluation of SMEs loans TO1 - BIDV 64

2.3.1 Achievements 65

2.3.2 Limitations and reasons 65

Chapter 3: SOLUTIONS TO EXPAND SMALL AND MEDIUM ENTERPRISE LOANS IN TRANSACTION OFFICE 1 - BIDV 71

3.1 Orientation and objective of expanding lending to small and medium enterprises 71

3.1.1 Orientation to expand lending to small and medium enterprises 71

3.1.2 Loan targets for small and medium enterprises 71

3.1.3 Loan targets for small and medium enterprises 72

3.1.3 BIDV's priority business lines for small and medium enterprises 72

3.1.4 General direction in credit relations for small and medium enterprises 74

3.2 A solution to expand lending to small and medium enterprises at Vietnam Development Bank - Branch of Transaction Center 1 75

3.2.1 Diversification of loan products 75

3.2.2 Develop a flexible interest rate mechanism for small and medium enterprises 75

3.2.3 Proactively search for customers 76

3.2.4 Minimize the procedures and time of lending to small and medium enterprises 77

3.2.5 Promote marketing 77

3.2.6 Modernize banking information 78

3.2.7 Improve the quality of credit officers 80

3.2.8 Continue to control credit quality 81

3.3 Proposal 82

3.3.1 For the Government 82

3.3.2 For the State Bank 83

3.3.3 For Viet Nam Commercial Joint Stock Bank for Investment and Development 84

3.3.4 For small and medium enterprises 85

CONCLUSION 87

REFERENCES 88 APPENDIX

i

LIST OF ABBREVIATION

1 BIDV Bank for investment and development of Vietnam JSC

ii

LIST OF TABLES

Table 1.1: Criteria to determine small and medium enterprises 12

Table 2.1: Captal mobilization in the period of between 2015-2017 34

Table 2.2: Outstanding loans between 2015 and 2017 36

Table 2.3: Revenues of BIDV - TO1 between 2015-2017 41

Table 2.4: Classification of SMEs by economic sectors by December 31 2017 43

Table 2.5: Classification of SMEs by economic sectors by December 12 2017 44

Table 2.6: Number of SMEs between 2015-2017 45

Table 2.7: Revenues from lending SMEs between 2015-2017 47

Table 2.8: Outstanding loans to SMEs by business type between 2015 and 2017 50

Table 2.9: Outstanding loans to SMEs by lending term in 2015-2017 52

Table 2.10: Reality of SMEs bad debts between 2015-2017 63

Table 2.11: Revenues from SMEs loans 2015-2017 64

Table 2.12: Customers' feedbacks to improve the product quality 64

iii

LIST OF FIGURES

Figure 2.1: Capital mobilization in the period of between 2015 and 2017 35

Figure 2.2: Outstanding loans by currency between 2015-2017 37

Figure 2.3: Outstanding loans by term between 2015-2017 39

Figure 2.4: Outstanding loans by customers between 2015 and 2017 39

Figure 2.5: Number of customers between 2015 and 2017 46

Figure 2.6: Revenue structure of lending SMEs by customer typ e between 2015 and 2017 47

Figure 2.7: Revenue structure of lending SMEs by business type between 2015 and 2017 51

Figure 2.8: Outstanding loans to SMEs by lending term in 2015-2017 53

Figure 2.9: Customer satisfaction about service products 55

Figure 2.10: Customer's feedbacks about interest rate and loan service fees 56

Figure 2.11: Customer satisfaction about service fee 57

Figure 2.12: Customer's feedbacks about distribution system 57

Figure 2.13: Customers' feedbacks about interaction between customers and bankers during transaction activities 58

Figure 2.14: Customers' satisfaction level of media marketing 59

Figure 2.15: Customers' satisfaction in terms of procedure, duration and process of borrowing 62

Figure 2.16: Customers' feedbacks about process and procedure of borrowing 63

1

INTRODUCTION

1 The necessity of the thesis

With the trend of globalization, international economic integration, small and medium enterprises (SMEs) play an important role in the process of national economic development Due to various advantages such as compact organizational apparatus without requiring much investment capital, easy to adapt to the market changes, SMEs have increasingly developed, which meets the requirements of innovation Therefore, developing SME is an important and long lasting strategy of the country

With their flexibility, SMEs have overcome various challenges, which increasingly assert their role and position in the economy, contributing to the economic growth, job creation, etc However, during the process of development, SMEs now face many difficulties One of its greatest difficulties is the shortage of investment capital for business production due to their limited access to finance The PCI 2015 survey found that the proportion of SMEs having access to bank loans was significantly lower than that of large firms On average, only 40% of micro enterprises have access to bank capital while small firms account for 62%, medium enterprises account for 74% while large enterprises account for 81% respectively

Over the past years, Bank for Investment and Development of Vietnam JSC -

TO 1 has focused on large state-owned enterprises with large loans without paying attention to SMEs Meanwhile, there are a number of SMEs customers having good financial status, effective production and business, which potentially brings many benefits to TO1 branch In addition, in the context of intense competition among commercial banks to large enterprise loans, expending small and medium enterprise loans is considered a suitable strategy of the bank Therefore, in order to improve competitiveness, to take over credit markets, the bank should have proper measures

to attract SMEs

Despite of the importance of expanding SME loans to the business operations of Bank for investment and development of Vietnam JSC- Transaction

2 Overview of the research

The credits field of commercial banks in general especially the credit provision of commercial banks for Vietnam enterprises have been a major of concern of many researchers with various studies such as

Hoang Thi Kim Oanh (2012), Solutions to expand the small and medium

enterprise loans in VP bank Da Nang, Master thesis, Da Nang University The

author has focused on the factors affecting the operation of SME loan expansion in

VP Bank Da Nang, assessing the advantages and disadvantages of SME loans at VP Bank Da Nang She also proposed some solutions to develop the lending market of the bank

Nguyen Thi Bac (2013), Some solutions to expand and improve the quality of

credit for small and medium enterprises at Vietin Bank - Ba Dinh branch, Master

thesis, Academy of Banking The author has mentioned some basic theories on expanding and improving the credit quality of commercial banks, as well as identifying criteria for assessing the expansion and improvement of credit quality, factors affecting this activity The author also focused on the issue of expanding and improving the quality of SME loans of Vietin Bank - Ba Dinh branch, Hanoi in the period of 2010 and 2012 From that, the author proposed some solutions to expand and enhance the quality of credits to Vietnam enterprise

Tran Cong Ly (2015), Solutions to expand SMEs loans in Lien Viet Post

Bank, Master thesis, University of Finance - Marketing The thesis focused on the

study and systematization of credit activities of commercial banks, which showed the role of bank credit for SMEs The author also analyzed the situation of SME loans in some joint stock banks and assessing the status of lending to SMEs in the Lien Viet Post Office - Dung Quat Branch in the period 2010-2014 The author has systematized the factors that affect credit relations between SMEs and joint stock

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commercial banks and come to some conclusions In addition, from analyzing its constraints and the cause of these constraints, the author proposed some solutions to expand lending to SMEs

Bui Manh Quang (2015), Credit capital sources of SMEs in Hanoi, Banking

news The author analyzes the access to finance of SMEs in Hanoi, through an analysis of the situation and provides guidance for SME access to capital

These studies pointed out the reality, the shortcomings and factors influencing the extension of SME loans On the theoretical and practical basis, the research proposed some suitable solutions to the specific situation of each bank in different stages of development

Currently, Bank for investment and development of Vietnam JSC - TO 1 have not had any research topic on expanding SME loan Therefore, this thesis is not published in any prior researches

- Propose some solutions to expand small and medium enterprise loans at Bank for investment and development of Vietnam JSC - Transaction Office 1 in the future

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6 Research methodology

6.1 Data collection method

- Primary data collection method: The primary data source collected by the author from the questionnaire, direct interview, and mail sent through questionnaire form This is important information that helps to understand BIDV's lending problem The survey aimed to obtain their opinion on the loan service of the Branch and their desires for the bank through the questions (Appendix)

As of 31/12/2018, BIDV - Branch of Transaction 1 has 1.017 SMEs The data collection by SME representative survey using the loan service at BIDV - TO 1 can be inserted into the study model Therefore, the author has issued to 190 SME customers who have been borrowing at the branch This will help the survey conducted objectively which can accurately reflect the opinion of customers on the loan service of the Branch The survey result was as follows:

+ Total papers given out: 190;

+ Total papers collected: 188;

+ Total appropriate papers: 185;

+ Total inappropriate papers: 03;

After the survey, the author analyzed results of 185 appropriate papers

- Secondary data collection method: Secondary data sources are collected mainly from documents, reports on business activities of BIDV - Branches of TO 1 such as: Performance reports business, report on the results of lending activities from 2015-2017, the information on services, interest rates are posted on the official website of BIDV

6.2 Data procession method

Post-collection data was included in the computer with the excel software to synthesize and re-formulate the necessary criteria for research purposes

6.3 Analysis method

From the information collected, the author analyzed and evaluated the achievements and constraints in the expansion of SME loans by BIDV - OT 1, then synthesized to propose solutions for SME loans in the future

5

7 The thesis structure

Apart from the introduction and conclusion, the thesis consists of 3 chapters Chapter 1: Fundamental issues of expanding small and medium enterprise loans in commercial banks

Chapter 2: Reality of explaining small and medium enterprise loans in transaction office 1 of Bank for Investment and Development of Vietnam JSC

Chapter 3: Solutions to expand small and medium enterprise loans in transaction office 1 of Bank for Investment and Development of Vietnam JSC

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Chapter 1: FUNDAMENTAL ISSUES OF EXPANDING SMALL AND

MEDIUM ENTERPRISE LOANS

1.1 Overview of commercial bank

1.1.1 Overview of commercial bank

a) Definition of commercial bank

Commercial banks have been formed, existed and developed for hundreds of years associated with the development of commodity economy The development of commercial banks has had a great impact on the development of the commodity economy In contrast, the commodity economy has developed to the highest stage, which is the common market economy The commercial banks have been constantly improved and become indispensable financial institutions

Each country has different opinions on commercial banks In Vietnam, under Clause 3, provision 3 of the Law on Credit Institutions 47/2010 / QH12 , following terms are given: "The commercial banks are those to carry out all banking activities and other business activities in accordance with this Law for the purpose of

profitability "[17]

In particular, banking is the business, regular supply of one or the following operations: receiving deposits, granting credit, providing payment services through accounts

b) Characteristics of commercial banks

- Structure of finance and assets: large enterprises will have high debt ratio and special asset structure

Commercial banks are large enterprises in terms of both equity and total assets In Vietnam, the equity of commercial banks is trillions For commercial banks

in the world, the equity is up to several billion dollars The network of branches is very large and geographically dispersed Despite large ownership capital, the capital of commercial banks is mainly external mobilized capital The asset structure of commercial banks is more special than that of other business enterprises in terms of proportion of financial assets Much of the assets of commercial banks are financial

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assets, characterized by abstraction, simple physical forms that are just on papers or even electronic data stored in a certain device In addition, commercial banks often tend to develop new products and financial instruments [15]

- The activities of commercial banks are always full of risks and under strict control and supervision of the legal system

On the corporate financial perspective, enterprises with high debt ratio will lead to high operational risk Besides, the main source of debt of commercial banks

is deposited with the characteristics withdrawn before the term with an amount that

is hard to determine Banking products and services are not entitled to monopoly protection which is complex and direct In addition, commercial banks participated

in many commitments without transferring real capital, which means that their offshore activities are rich and diverse This is a distinctive feature from other types

of businesses For these reasons, commercial banks face more risks than other businesses Risks in the operation of commercial banks are diversified with high level, fast accumulated and easy to spread Risks in the operation of commercial banks include specific risks such as credit risk, liquidity risk, interest rate risk, foreign exchange risk, liquidity risk, moral hazard [15]

Being a large enterprise with extensive network, which is exposed to many risks, will significantly affect many socio-economic activities; commercial banks are under strict control and supervision of the law-making system The legal regulations for commercial banks are widely disseminated in many aspects of business activities such

as business conditions, standards of bank leaders, compulsory reserves, deposit insurance, safety in operation, classify debts and make deductions for setting up risk provisions, using its own capital to invest in fixed assets,…

- The linkage and stability of banking system

The banking system has a strong mutual dependence More than any business in the economy, risk in banking activities is rapidly spread Due to their operation as a link system, no matter how big or small a commercial bank is, if it has difficulty in operation, especially liquidity problems, this can lead to the risk of system collapse

8

The banking system - finance in the economy is very sensitive to all economic, technical, political and social changes These fluctuations often have an almost immediate impact on the functioning of the financial market, typically the stock market, in which it directly affects the functioning of the banking system For the macro management of the economy, the grasp of the mechanism of operation and mutual influence of members in the financial system is one of the key issues to decide success [15]

1.1.2 Basic activities of a commercial bank

a) Capital mobilization

Capital mobilization is an activity to create business capital for commercial banks This is basic and the most important activity which exerts strongest influence on a bank's activity Funds are mobilized by the bank in different forms such as mobilization

in the form of deposits, borrowing, issuance of valuable papers [14, p 274]

In addition, commercial banks can create capital for their business through the agent or authorized capital for organizations and individuals at home and abroad

- Deposit: Commercial banks receive deposits from organizations, individuals and other credit institutions in the form of demand deposits, term deposits and other types of deposits

- Issuance of valuable papers: The commercial banks shall issue certificates

of deposits, bonds and valuable papers to mobilize capital of organizations and individuals at home and abroad when approved by the Governor of the State Bank

- Loans from other credit institutions: This activity allows commercial banks

to borrow capital from other credit institutions operating in Vietnam and foreign credit institutions The commercial banks can borrow and lend each other through the interbank market This is the case where commercial banks have a low level of deposits at the State Bank of Vietnam and do not meet the demand for payment Then under the organization of the State Bank, the bank will be able to borrow from other banks with excess deposits at the State Bank In addition, banks can borrow directly from each other without crossing the interbank market This method is very flexible, helping banks to balance capital in a timely manner

9

- Short-term loans from the SB: This is a loan that addresses urgent needs of commercial banks Commercial banks in case of insufficient liquidity or temporary reserve deficits can borrow money from the SB Some forms of State Bank lending commercial banks:

+ Refinancing

+ Discount, rediscount of commercial paper of other short-term valuable papers + Loans secured by mortgages or pledged commercial papers and other short-term valuable papers

+ Other forms of capital mobilization as stipulated by the SB

b/ Credit activities:

Bank credit is a credit relationship between a bank and a person who is another subject in the economy in which the bank plays the role of both a borrower and a lender This means that commercial banks are intermediaries who transfer capital from temporary excess capital to the shortage Entities involved in credit relations are banks, the state, enterprises and households The object used in credit relations is money This is the highlight and distinctive feature of bank credit with other types of credit

Large commercial banks now diversify forms of credit from short, medium and long term Banks provide credit to organizations and individuals in the forms of lending, discounting commercial papers and other papers of other types, guarantees, financial leasing and other forms as prescribed

Credit granting is an agreement for organizations or individuals to use a sum

of money or a commitment to allow the use of a sum of money on the principle of repayment by lending, discounting or financial leasing payment, bank guarantee and other credit operations

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demands of the spending and investment in assets of organizations and individuals

in the economy; this contributes to increasing the efficiency and speed of capital flow in the economy [14, p 275]

For most commercial banks, the loan ratio accounts for more than half of the total assets which is the main profitable business, the main source of income to cover the costs of commercial banks Basically, with this operation, commercial banks transfer the right to use for a certain amount of their capital to customers in exchange for income However, lending is also one of major concerns of commercial banks, in which its greatest risk is credit risk without capital recovery possibility

- Guarantee: The commercial bank shall be provided with loan guarantee, payment guarantee, contract performance guarantee, bidding guarantee and other forms of bank guarantee in the prestige and financial capacity of the recipient

- Financial leasing:

Financial leasing is a medium- and long-term credit activity through the lease

of machinery, means of transport and other movable assets on the basis of a lease between the lessor and the lessee The lessee engages in the purchase of machinery, equipment, means of transport and other movable assets at the lessee's request and holds the ownership of the leased assets The user of the leased property and payment of rent during the term of the lease are mutually agreed upon [5, p 118]

Commercial banks are allowed to operate finance leasing but have to set up their own financial leasing companies The establishment, organization and operation of the finance leasing company must be implemented in accordance with

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the Decree of the Government on organization

1.2 Overview of small and medium enterprises

1.2.1 Small and medium business concept

First, we need to understand the business Generally speaking, an enterprise

is an economic organization established to produce and supply goods or services on the market

In Vietnam, under Enterprise Law No 68/2014 / QH13: "Enterprises are organizations with their own names, assets and transaction offices, which are registered under law for business purposes "[19]

"Business is the continuous pursuit of one, several or all stages of the investment process, from production to sale of goods or the provision of services on the market for profit purposes." [19]

It is noteworthy that the enterprise must be an independent economic entity, with or without legal status, named and operating on its own behalf, carrying out production and business activities It operates in the market and takes independent responsibility for all its business activities Secondly, depending on the purpose of establishment, each enterprise has different purposes However, for a small number

of enterprises operating in the public sector, their purpose is to maximize profits

The concept of small and medium enterprises is interrelated; which varies during different stages of socio-economic development and depends on the level of development of each country SMEs are production and business establishments which have the legal status of doing business for profit purposes on a limited scale according to criteria of capital, labor, turnover and added value obtained in each period in accordance with the regulations of each country

In Vietnam, the concept of SMEs is regulated by Decree 39/2018 / ND-CP:

"SMEs are classified by size including micro, small, medium and small enterprises" [3]

of labour

to engage

in social insurance per year

Total revenue

of the year

Total capital

Average number

of labour

to engage

in social insurance per year

Total revenue

of the year

Total capital

Average number

of labour

to engage

in social insurance

Total revenue

of the year

Total capital

≤ 3 billion dong

≤ 3 billion dong

≤ 100 people

≤ 50 billion dong

≤ 20 billion dong

≤ 200 people

≤ 200 billion dong

≤ 100 billion dong

Commerce

and service

≤ 10 people

≤ 10 billion dong

≤ 3 billion dong

≤ 50 people

≤ 100 billion dong

≤ 50 billion dong

≤ 100 people

≤ 300 billion dong

≤ 100 billion dong

(Source: Decree 39/2018/NĐ-CP)

1.2.2 Characteristics of small and medium enterprises

In recent years, the number of SMEs has been increasing rapidly SMEs have very different characteristics compared to large firms in the market:

- Having small capital scale:

This is the most basic feature of small business capital, which determines other characteristics of the SME This makes it difficult for SMEs to access capital

in the market, especially credit by credit institutions, who often assume that SMEs are potentially high risk so they are often unwilling to provide credit As a result, SMEs are always in a state of lack of capital and limited profitability even when they discover that business opportunities can be profitable

SMEs are small in size and have difficulty accessing official capital, especially in developing countries This is a great obstacle in the deployment and application of new scientific and technological advances to commercial activities in

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general and the promotion of online commerce in particular

- Fierce competition from large corporations of the same business:

In the process of integration, large corporations tend to reach out to the world, establish branches and subsidiaries in countries with many advantages, so the small and medium enterprises in the country must find new methods and tools in business [27]

- Most SMEs are non-state owned enterprises:

SMEs are mostly private enterprises due to their small size and small number

of employees This makes it difficult to manage SMEs This makes it difficult to manage the SMEs Especially for private enterprises that are flexible but ineffective Private businesses often do not have a strategic vision for their businesses when they are established and in operation During the operation of production and business, if there is an event occurs, there is no experience of prop or not being able

to resist, leading to loss or bankruptcy The management of private enterprises is also very difficult Many enterprises deliberately committed illegal activities, deliberately evaded taxes and failed to properly implement the financial and accounting regime For good management of SMEs, requires a close watch and is indeed effective This can control the operation of this type of business

- Having an efficient organizational apparatus capable of easily diverting business according to the market's evolution:

With the advantages of scale, light, dynamic, easy to manage, SMEs are easy

to adapt to changing market demand, ability to change production and business plans, fast and appropriate changes Due to the small scale, the structure of production and the structure of the labor force are less difficult for SMEs than for large enterprises SMEs can easily find niche markets and enter this market when their business is profitable or withdraws when the business becomes difficult and profitable [1]

- Poor market access, especially in international market:

The main reason is that SMEs have a lot of financial constraints, the market share

of SMEs is generally not large, the market dominance is not high, and the budget

- With limited resources, DVVs are more likely to focus on consumer goods than on heavy industries, which require capital In Vietnam, according to the Trade Promotion Department, about 43% of small and medium enterprises operate in the manufacturing sector, 24% in trade and distribution, and the rest operate in the manufacturing sand agriculture [27]

1.3 Commercial banks' lending activities for small and medium enterprises

1.3.1 The concept of small and medium business loans

Under Clauses 16 and 14, Article 4 of the Law on Credit Institutions No 47/2010 / QH12:

"Lending is a form of credit whereby the lender assigns or commits to a client a sum of money to be used for a specified purpose within a specified period

of time in accordance with the principle of repayment and interest "

"Credit granting is an agreement for an organization or individual to use a sum of money or a commitment to allow the use of a sum of money on the principle

of repayment by way of lending, factoring, bank guarantee and other credit operations.”[17]

According to the above definition, lending is one of the commercial activities

of commercial banks in order to meet customers' capital needs on the basis of agreement between the two parties on the loan term and the time of paying both principal and interest

In terms of commercial banks, lending is one of the most important activities; it increases the turnover of commercial banks In terms of borrowers in

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general and SMEs in particular, the mobilization of capital from the NH seems to be mandatory if they want to maintain and develop their business activities Commercial lending is an important channel for mobilizing capital in the economy Through this activity, idle resources in the population will be mobilized and used in the most effective way to meet the demand of socio-economic development of each country

Accordingly, from the author's point of view: SME lending is a lending

activity in which commercial banks give SME loans for a certain period of time At the end of the term, the principal and interest are repaid

1.3.2 Forms of lending to small and medium enterprises

There are many forms of SME lending, the classification of loans for the purpose of managing the most effective loans Forms of SMEs are classified based

on the following criteria:

Overdraft is a form of short-term, flexible and simple procedures, most of which are unsecured, which can be granted to businesses a few days a month or several months in a year Therefore this form is generally used only for enterprises with high reliability, regular income and short income period

+ Direct loans each time:

Direct loans are one of the most popular forms of bank lending for enterprises that do not need regular loans and do not have conditions to obtain overdraft limits Some businesses only use equity and commercial credit mainly

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when there is seasonal demand or the need to expand production specifically to borrow from banks This means that capital from the bank only participates in a certain period of business cycle

+ Loans under credit limit:

This is the credit business whereby the bank agrees to grant credit to the business Credit lines can be issued for the whole period or at the end of the period That is the maxim um balance at the time of calculation [5, p.]

Each time borrowing, the business only needs to present the plan to use the loan, to submit proof of purchase or service and request the loan After checking the legal nature of the documents, the bank will disburse to the enterprise

This is considered as a convenient form of lending to enterprises that borrow regularly, loans are often involved in production and business In this operation, the bank will not set the date of repayment When the enterprise has income, the bank will collect the debt, thus creating a proactive management of funds for enterprises However, due to the fact that the loans are not separated into specific debt terms, it

is difficult for banks to effectively control the use of each loan Banks can only detect problems when businesses submit financial statements or outstanding debt does not decrease

+ Flexible loans:

Flexible loans are based on the flow of goods When a business lacks capital, the bank may lend money to purchase goods and collect debts when the enterprise sells goods [5, p.112]

At the beginning of the year or at the beginning of the quarter, enterprises wishing to borrow capital must apply for a rotating loan Banks and businesses will agree

on the type of loan, the credit line, the sources of supply and the ability to consume Credit lines can be negotiated for a year or a few years This is not a repayment period, but rather a period of time when the bank re-examines the relationship between the Bank and the business as well as the financial situation of the business

Loans are very convenient for businesses Loan procedures are only required once for multiple borrowing Enterprises are able to meet their capital needs in a

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timely manner, so payment to suppliers is fast If the enterprise encounters difficulties in the process of consumption, the bank will have difficulty in recovering capital due to the loan term is not clearly defined

+ Installment loans:

Installment loan is a form of loan in which the bank requests the customer to pay principal several times within the agreed credit term Installment loans are usually applied to a large portion of bank credits, especially medium and long-term loans, for fixed assets and durable assets [5, p.114]

This type of loan is highly risky because enterprises often mortgage by accumulated goods Debt repayment depends on the income of the business If the income of the business is reduced, the ability of debt collection of the bank is also affected Because of the high risk, the interest rate on installment loans is usually the highest interest rate in the lending interest rate range of the bank

1.4 Expand lending to small and medium enterprises of commercial banks

1.4.1 The concept of lending extension for small and medium enterprises of commercial banks

In broad terms, the market is an area of exchange and circulation of goods In the market, there are trading and exchanging activities of products and services It is

a meeting place of supply and demand, where both buyers seek their own interests

According to Philip Kotler, "The market consists of all potential customers who have a specific need or wish, willingness and ability to engage in exchange to satisfy that need or desire" [22, Tr 17]

Expanding the market for businesses in general, for commercial banks in particular is very important for business Market expansion is a condition of existence, increasing the profitability of commercial banks; helping commercial banks to develop stably, increase market share, enhance their position in the domestic market and the world

Expanding lending to small and medium-sized enterprises (SMEs) of the commercial banks from the author's point of view can be understood as the increase

in the number of SMEs having a loan relation, increasing the list of lending

- Expansion of quality means that the bank increases the quality of loans such as reducing the rate of non-recoverable bad debt, increasing the income from the expansion of lending to SMEs, Project financing and credit risk management Expanding in terms of quality does not directly reflect the expansion of SME lending but it is important to assess the safety and effectiveness of SMEs loans

1.4.2 Aims of expanding small and medium enterprise loans

- Risk diversification: Today, along with the ongoing development of credit institutions, the risk of exposure is very high Although the focus of the loan on a small number of enterprises can save the cost of appraisal, enhance the management efficiency, the risk of losing capital to banks when these enterprises have difficulties

in production Business is even bankrupt Therefore, the risk spreading to SMEs in large amounts, the capital of a small loan will avoid the bank losses In addition, SME business lines are diversified so the expansion of credit for these businesses also helps commercial banks to diversify their risk rather than to focus on lending to certain industries

- Increased revenue and profit from interest and other service fees: Due to low technology and capital requirements, entry to SMEs is relatively easy Therefore, the number of SMEs has been constantly increasing The increase in the number of SMEs demonstrates that the demand for credit for SMEs is very high, and the demand for financial services (such as payment services, consulting services, insurance services, etc.) also increased Therefore, expanding lending to SMEs promises to bring more profit to commercial banks, not only from loan interest but also from fees due to use of other banking services

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- In addition, in the context of fierce competition among banks, banks are prone to developing retail banking, and expanding lending to SMEs not only increases revenues, profits but also helps the bank improve its position

- Loan expansion also enhances the level of Customer Relationship Management, whereby the competitiveness of the bank is enhanced This is essential for commercial banks in the context of integration, when facing competitors with advantages in terms of capital, technology and qualifications

1.4.3 The contents of expanding small and medium enterprise loans

a) Market research for SME loan services of commercial banks

For general lending services and SME lending services in particular, before deciding to enter a market, launch a new product, or launch a media promotion campaign, or make a regulatory decision One of the incentives such as lower interest rates, borrowing costs, changes in conditions and beneficiaries, etc The first

is to study the market first in order to understand the size of the market, the behavior, the needs and desires of customers, the product situation, and the market share of competitors to meet the real situation The market needs, and to have a solid information base when developing detailed plans close to reality, to effectively use the resources of the Bank

- SME loan market size of commercial banks: Reveals through sales and

sales growth and loan balance for SMEs The size of the SME loan market increased as a result of sales, the proportion of SME loan outstanding At present, the turnover and ratio of outstanding loans of commercial banks have increased significantly, contributing to the increase in total lending, total assets and income of commercial banks On the other hand, interest income from SME lending is increasing and ensuring positive changes The number of SME loan clients has increased significantly, which created favorable conditions for commercial banks to deploy new products, thus increasing the size of the lending market for SMEs, both

in width and in depth

- The situation of SME loan products and services: mainly consists of products meeting the demand for loans for production business Today, commercial

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banks are increasingly investing in developing S & T lending products, but also focus on designing new product lines that are being pushed into increasingly diversified network Meet the diverse needs of customers

- The distribution of products and services: it is reflected through the

distribution system, through the transaction network such as the number of transaction offices, etc to shorten the distance between the bank and customers In general, commercial banks are paying attention to the development of distribution system through the increasing of transaction offices, spacious design with modern equipment system to attract and satisfy the customer needs At the same time, the

marketing campaign has been carefully considered with strong promotion programs

Besides, the emphasis in building and developing the brand to build up the prestige

of the bank with the trust of customers from the service delivery customers are

developed in the positive, professional and modern direction

- Competition situation of commercial banks in the SME loan market:

Competition in the banking sector is becoming more acute The risk from the development of the current rivals and the market entry of new enterprises and

financial institutions such as:

+ Risks from foreign banks: As Vietnam is increasingly open to economic integration, the banking sector has been, and will be, fundamentally changing as foreign financial institutions with strong potentialities are ready to join The market increases the competitive heat for commercial banks and makes the level of competition in the field of lending in general and SME lending in particular increasingly fierce Hence, customers will have more choices They are more sensitive to cost, interest, and service quality than ever before

+ Threats from domestic banks: At the moment, the market for SME loan services is competitive with many domestic banks with low cost, large scale and prestige In addition, there are some new banks with competitive policies such as frequent customer care, attractive interest rate policy and promotions, superior response of the portfolio Banking products and services with the needs of customers have created the competitive edge of each bank in the market, which

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poses great challenges in expanding market share among commercial banks

b) Select the target segment market for SME loans of Commercial banks

Select the target market segment based on market segmentation of large SME loan services by the number of clients with different characteristics, thus forming the different needs and objectives

c) Tools to expand the SME loans

Tools to expand the market for SME loan services include:

- Service products: includes catalog, attributes, completing and development

of new products

- Interest rate and attached service fees: is the amount that the customer must

pay to be entitled to use a sum of money in a certain time or use the product provided by a commercial bank provided by the commercial bank

- Distribution channel and network of the transaction office is a direct tool to

bring products and services of commercial banks to customers Characteristics of the product distribution channel: direct distribution, including traditional distribution channels such as branches and transaction offices; and modern distribution channels such as internet banking The goal of the distribution policy is to expand the market, increase sales and profits, improve competitiveness and lower costs

- Combined promotion: It is a set of activities to encourage the use of

commercial banking products, as well as increase the understanding of customers, stimulate consumer demand, increase the level of loyalty of existing customers This can also attract customers in the future; create favorable conditions for customers to participate in the process of providing services, thereby increasing the prestige of commercial banks in the market Promotion activities must be conducted regularly, continuously and sustainably for a long time Combined promotion activities include sales, promotion, advertising, promotion, sponsorship, etc., and are governed by various modes of communication Combined promotion policies include defining traditional goals, designing communication messages, selecting media channels, identifying budgets, and evaluating the effectiveness of promotional activities

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- Development of the brand of small and medium loans is to reinforce the customers’ trust to the banks

d) Expanding SMEs loans of commercial banks

The credit process is an overview of the work of the bank from the client's loan application until the credit decision, disbursement, debt collection and liquidation of the credit agreement The credit process identifies the relationship between the various components involved in the credit activity [5, p 161]

Normally, each commercial bank has its own loan process The lending process must comply with the provisions of the law and suit the specific conditions

of each bank In general, however, the SME lending process follows the following basic stage

Stage 1: Customer Marketing and Credit Reporting [5, p 163]

Bank staffs study market, environment and do customer research to find out the demand for loans, and introduce the bank's credit policy to customers Bank staff will collect the necessary information and documents, on the basis of which they will make the loan application and credit proposal

In general, a set of loan applications needs to be included information such as: legal capacity of customers, use of loans, collateral assets, and ability to repay loans

Stage 2: Review results of appraisal [5, p 164]

Credit proposals must be reviewed independently by the credit risk management department Analyze possible scenarios that lead to bank risk, anticipate remediation, projected mitigation measures, and mitigate bank losses Analyze the truthfulness of the information collected from the customer in Stage 1; from that, the attitude and goodwill

of customers as the basis for decision-making loans

If the credit proposal is incomplete or incomplete, the credit risk management department will consider and return to the credit proposal unit In contrast, the credit proposal and comments of the credit risk management department will be forwarded to competent authorities for appropriate credit approval

Stage 3: Credit Approval [5, p 164]

Decisions are approved by the credit committee or department head, deputy

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head / deputy head, separated from the credit initiation function and risk assessment

Stage 4: Sign the credit agreement and the loan guarantee contract [5, p 165]

Bankers draft credit contracts The department of credit risk management will control credit contracts Then these contracts will be delivered to the customer service department for staffs to negotiate the contract with the customer and get the signature

If the customer does not accept the draft contract or request a modification, a revised proposal must be prepared and approved in advance by the authority

Stage 5: Disbursement [5, p 165]

When customers request to withdraw capital together with the contract signed complete This request was sent to the customer service department, then to the credit manager to handle the operation

Credit management will check the purpose of the withdrawal and check the completeness of the loan / loan application

Stage 6: Monitoring and Control [5, p 165]

Supervision and control are key determinants of credit risk management Customer staffs regularly check the actual use of loans by customers, the status of security assets, and the financial status of customers to ensure the ability to recover debts or take measures for timely detection of abnormalities

Stage 7: Modify Credit [5, p 167]

During the term of the loan agreement, customers or banks may request adjustment / amendment of the terms of the credit agreement (withdrawal, interest rate adjustment, collateral, Levels, ) Both banks and customers must discuss these adjustments / modifications on the basis of ensuring safety and profitability for banks as well as create favorable conditions for customers

Stage 8: Debt collection, interest, fee, credit liquidation, periodic review [5,

p 167]

The credit management department sends the maturity notice to the customer and the customer department staff is responsible for contacting the customer to discuss the possibility and intention to repay the customer's maturity date

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If the customer is goodwill but unable to repay the debt customer room staff

to consider the extension of debt to customers If it is not possible to extend the debt

to customers and customers cannot pay off the debt on maturity, the customer service department must immediately notify the person in charge and the department of credit risk management

If the credit is repaid, the credit management department will provide proof

of repayment to the customer room and instruct the customer department to release the file

Comprehensive review must be conducted at least once a year For high risk items, a comprehensive review is required every half year

e) To control the provision of commercial loan services by commercial banks

Control of lending service is an important Stage in credit supervision of commercial banks The objective of controlling the performance of a loan service is

to ensure that the loan is used properly for its intended purpose, to control credit risk, to detect and remediate errors that may affect ability to recover debt later Some monitoring measures that banks often apply:

- Monitoring customer account activity at the bank: Through the operation of customer accounts will reflect the situation of product consumption, cash flow, use

of loans and repayment Abnormal fluctuations in the account will reflect difficulties in financial management, which is a sign that customers have difficulty paying, so that the bank will follow the signs that have a focus control

- Visiting and controlling the location of business activities of borrowers When visiting a client during the loan period, it will help the bank to obtain useful information such as the maintenance of customers' willingness to repay, the status

of production and business, Assured asset quality

- Checking loan guarantees: The checks are performed by checking the current status of the assets and by reviewing the client's regular reports on the status

of the property In cases where assets are subject to risks such as fire, landslide or market fluctuations, the banks must promptly adjust the contracts to suit the new conditions

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- Monitor customer activity through relationships with other customers For other clients this is supervision through account or loan, which shows the performance of customers borrowing such as progress of purchase, sale of goods, solvency, degree of contract discipline, honesty in financial statements, business plan

- Surveillance through other information: As the bank analyzes information from the Center for Risk Prevention, from the media, tax authorities, courts Various information channels like this Customers are very important to the decision making of commercial banks

The implementation of strict and adequate measures will help the Bank control and limit the bad debt situation, credit sources are used for the purposes set out, contributing to promoting the economy save pine, healthy development

1.4.4 The criteria reflect the expansion of SME lending in commercial banks

Loan expansion is a matter of always attracting the interest of banks because the increase in loans means higher revenue and therefore the profit will also increase Thanks to that, the position of the bank has been improved in the market Therefore, the assessment of the effectiveness of loan expansion has become very important We can assess the expansion of lending to SMEs through a number of key indicators as follows:

- Number of SMEs having credit relations with banks:

Number of new SMEs

having credit relations

with bank

=

Number of SMEs having credit relations with bank this year

-

Number of SMEs having credit relations with bank last year This indicator shows the increase (if> 0) and the decrease (if <0) in number

of SMEs having a credit relationship with the bank This is the most specific indicator that reflects the bank's ability to expand its lending to SMEs However, when researching this indicator, it must be in relation to other indicators

- Odd debt:

This is a time-based indicator, reflecting the amount that the bank currently lends to a particular point of time and is also an indicator of the bank's viability,

Outstanding loans to SMEs last year Outstanding loans to SMEs last year

These two indicators reflect the scale of lending to SMEs this year compared

to the previous year The higher the ratio is, the higher the loan balances for SMEs

In particular, the growth rate of outstanding loans reflects whether level of expansion of loans is quickly or slowly:

If the growth rate of outstanding debt <0: the later outstanding loans is smaller than the previous outstanding loan, which means that the bank has reduced lending to SMEs

If the outstanding loan growth rate is> 0: the later outstanding loan balance > previous outstanding loan, which reflects the faster expansion of SMEs loans

- Loan sales:

Loan amount is the total amount of money lent in a period by day, month, quarter, and year This is an indicator reflecting the size and quality of lending activities

Growth rate of loan

- Total outstanding loans

This proportion reflects the expansion of lending to SMEs over large enterprises If this ratio is increasing over time, it is becoming more and more

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important for banks to pay attention to the expansion of lending to this type of business

- Profit from lending to SMEs

The goal of banking is to make the business as profitable as possible, so any banking activity needs to secure that goal Expanding lending is not just about increasing your balance, increasing the number of customers you borrow, and more importantly, securing a profitable loan for your bank This is the most important indicator for commercial banks to expand lending to SMEs

Profit from lending

Revenue from lending

Thus, increasing profits means finding ways to increase sales and reduce costs

- Quality of lending to SMEs:

+ Overdue debt and the ratio of overdue debt to SMEs:

Used to evaluate the loan quality of SMEs This indicator reflects the quality

of assets at a time, the efficiency of using capital, the sense of debt repayment as well as the financial capability of customers The higher the ratio, the less effective the loan is

The ratio of overdue loans to SMEs

Overdue loans to SMEs

x 100% Total outstanding loans to SMEs

+ Bad debt and the ratio of bad loans to SMEs:

Increasing the size of SMEs must go hand in hand with loan quality improvement Commercial banks could not only expand lending without caring about bad debt ratio and this also means that commercial banks can only continue to expand lending when this expansion does not increase the bad debt ratio total loans

According to Circular 02/2013 / TT-NHNN effective from June 1, 2013, debts are classified into 5 groups as follows:

Group 1: Standard debt

Group 2: Special mention debts

Group 3: Sub-standard debt

Group 4: Doubtful debts

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Group 5: Potentially irrecoverable debts

The classification of debts into different debt groups from low to high is to assess the quality of loans, the higher the debt classification is, the lower the quality and the higher the risk Bad debts are those in groups of 3,4,5

The ratio of bad debts to total outstanding loans at a time is a ratio to assess the quality of lending of commercial banks

Bad debt ratio for SMEs (%) = Bad loans to SMEs x 100%

Total outstanding loans to SMEs

1.4.5 Factors affecting the expansion of commercial bank lending to small and medium enterprises

a) Factors related to commercial banks

- Bank objectives:

In a given period of time, all banking activities are aimed at achieving a certain business objective and strategy Therefore, the decision to extend lending to any object must be based on the general objectives of the bank

- Capacity and prestige of the bank: To expand bank lending must have the

capacity: capacity of capital, capacity of human resources, distribution network, and technology

In terms of capital: The size of the bank's capital decides to extend the loan,

only when new capital can be extended to lend Own capital of commercial banks represents the financial strength of that bank, the higher the capital is, the stronger the bank To manage the scale of operations, commercial banks are only allowed to mobilize a certain amount of capital compared to their own capital Therefore, large capital will be a condition for mobilizing capital on a scale great On the other hand, for risk management, the SBV sets limits such as the limit on loans to a single customer, the ratio of short-term capital used for medium and long-term loans, the rate of self-financing for procurement fixed assets These factors directly or indirectly affect the expansion of lending of commercial banks [25]

In terms of human resources: The size and quality of the bank's staff also has

an impact on lending To expand the loan must have the corresponding human

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resources Human resources not only have enough quantity but also must meet quality If credit quality is not guaranteed, it will adversely affect the quality of credit, thereby affecting lending Not only direct human resources but also the quantity and quality of credit control systems should be adequately aligned to ensure credit quality control [25]

In terms of network: Wide-area network is a positive influence on loan

expansion The wide network will facilitate the expansion of capital mobilization, which in turn affects lending The broad network will facilitate customers to trade with banks more conveniently from which to extend the loan On the other hand, the broader network also helps banks to expand their service activities, which indirectly accelerate lending

The commercial banks of Vietnam now and most of JSCBs are pursuing retail banking strategy so the network is an important factor to expand lending Normally, commercial banks established in big cities then opened branches to expand their operations and expand their lending

In terms of technology: Commercial banks are very interested in technology,

they often take the lead in the application of technology is the computer technology

As lending expands the number of transactions increases, the value of transactions increases requiring the improvement of management technology Conversely, modern management technology will increase labor productivity and increase product quality, thereby reaping the benefits of expanding lending

- Bank's credit policy:

Credit policy is a system of measures related to credit expansion or credit restriction to achieve the planned goals of the commercial bank Therefore, making credit policy is critical to the success or failure of each bank A sound credit policy will attract many customers; ensure the profitability of credit operations on the basis

of risk dispersion, compliance with the law and the direction of the State Bank Any bank that wants to improve its performance must have a credit policy that is appropriate to its specific circumstances

b) Factors outside commercial banks

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- Factors related to small and medium enterprises:

+ Demand for loans from customers: The demand for loans from customers

affects the value of the loan, thus increasing or decreasing the loan balance of the bank

+ Capability of management, production capacity and financial capacity of customers: These criteria reflect the financial capacity, business efficiency of the

business and the ability to repay the bank The higher the business capacity and the financial capacity of the business, the more favorable conditions will be for the

bank to expand its credit and vice versa

+ Security Assets: The higher the liquidity of assets, the less volatility in

value, the long life cycle and the greater the value of the loan, the more favorable condition will be for the bank to expand its credit

+ Ethics and reputation of customers: This is a factor of great significance and

importance in the process of loan appraisal A potential financial customer has a feasible plan; however, morals and prestige are not guaranteed as there have been overdue debts, low ethics and business scandals, the bank refuses to grant Credit to customers

- Environmental factors:

+ Political and social environment:

The socio-political stability will attract investment, businesses are confident

to make investment decisions so that capital needs for new investments to expand production If the social and political environment is unstable, investors will withdraw their capital so that the demand for capital will decrease accordingly

Political stability is a precondition for stability and economic development, between political stability and economic stability and economic development have a dialectical relationship with one another Economic stability, political stability and security are factors that promote business production from which it facilitates the expansion of lending

Not only domestic politics but international political situation also affects the expansion of lending Globalization is an indispensable trend; economies of nations are now developing in the direction of developing an open economy to take advantage of the opportunities for economic development Open economies are