Analyzing small and medium enterprise lending activities case study of MSB bank

On the theoretical and practical basis, the author offers solutions to improve the quality of corporate loans in the credit activities of the Global Petroleum Commercial Joint Stock Bank

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

-

NGUYỄN THANH HIẾU

ANALYZING SMALL AND MEDIUM ENTERPRISE LENDING

ACTIVITIES - CASE STUDY OF MSB BANK

PHÂN TÍCH HOẠT ĐỘNG CHO VAY DOANH NGHIỆP VỪA VÀ NHỎ -

TẠI NGÂN HÀNG TMCP HÀNG HẢI VIỆT NAM

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

HÀ NỘI - 2020

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

-

NGUYỄN THANH HIẾU

ANALYZING SMALL AND MEDIUM ENTERPRISE LENDING

ACTIVITIES - CASE STUDY OF MSB BANK

PHÂN TÍCH HOẠT ĐỘNG CHO VAY DOANH NGHIỆP VỪA VÀ NHỎ -

TẠI NGÂN HÀNG TMCP HÀNG HẢI VIỆT NAM

Chuyên ngành: Quản trị kinh doanh

Mã số: 60 34 01 02

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: PGS.TS PHẠM VĂN HỒNG

HÀ NỘI - 2020

ACKNOWLEDGEMENT

I would like to express my sincere gratitude and appreciation to Assoc Prof

Dr Pham Van Hong for her patience,

the thesis

Last but not least continuing encouragement, endless support and immense knowledge She has generously provided me all the guidance, comment and constructive advices that made this thesis achievable

Besides, I would like to thank the rest of my thesis committee for their insightful comment and encouragement but also for the hard question which incented

me to widen my research from various perspectives

My sincere thank also goes to my colleagues who provided me an opportunity

to access to the database as well as their point of view about the business Without their support it would not be possible to conduct this research

Thank to my classmates for enlightening me the first glance of research and showing me knowledge and experiences to accomplish, I would like to thank my family for supporting me a throughout writing this thesis and my life in general

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CONTENTS

ACKNOWLEDGEMENT i

ABREVIATION iv

LIST OF TABLES v

LIST OF FIGURES vi

CHAPTER 1: INTRODUCTION 1

1.1 Rationale of the research 1

1.2 Research Objectives 3

1.3 Research questions 3

1.4 Research scope 3

1.5 Research methodology 3

1.5.1 Data 3

1.5.2 Research Methodology 4

1.6 Research structure 4

CHAPTER 2: THE THEORETICAL FRAMWORK ON SME LENDING ACTIVITIES OF COMMERCIAL BANKS 6

2.1 Overview of SMEs 6

2.1.1 Concepts of SMEs 6

2.1.2 The characteristics of SMEs 11

2.2 The Criteria of Commercial bank’s lending to SMEs 13

2.2.1 Concepts and Importance of lending to SMEs 13

2.2.1.1 Concepts 13

2.2.1.2 Importance of lending to SMEs 14

2.2.2 Criteria for analyzing SME lending 16

2.2.2.1 Quality ratios 17

2.2.2.2 Productivity rotios 18

2.2.2.3 Quality ratios 20

2.2.2.4 Profitability ratios 21

2.3 Impact factors for lending SMEs 23

2.3.1 Internal factors 223

2.3.2 External factors 25

CHAPTER 3: FACT FINDINGS OF SME LENDING AT MSB BANK 29

3.1 Overview of MSB Bank 29

3.1.1 General Information 29

3.1.2 History and Milestone 30

3.1.3 Business model and organizational structure 31

3.1.4 Business performance 34

3.2 Criteria for analyzing SME lending at MSB Bank 36

3.2.1 Credit Policy and Procedure 36

3.2.1.1 SME Definition 36

3.2.1.2 Credit Procedure 36

3.2.2 Analyzing the SME lending activities at MSB Bank 39

3.3 Analyzing impact factors for SME lending at MSB 55

3.3.1 Key achievements 55

3.3.2 Limitations 57

3.3.3 Reasons for limitation 58

3.3.3.1 From MSB Bank 58

3.3.3.2 From External Factors 61

CHAPTER 4: RECOMMENDATIONS 64

4.1 Orientation of SME lending 64

4.2 Recommendations 64

4.2.1 To MSB Bank 64

4.2.2 To SBV and related agencies 68

CONCLUSION 70

REFERENCES 71

APPENDIX: INTERVIEWS 79

iv

BREVIATION

LIST OF TABLES

Table 2.1 Examples of quantitative criteria used in defining SMEs in some counties 9

Table 2.2 SME Definition in Japan 10

Table 3.1 Comparison SME classification between MSB and the Government 36

vi

LIST OF FIGURES

Figure 3.1 Organizational structure of MSB Bank 333

Figure 3.2 Financial indicators 35

Figure 3.3 The growth of SME credit customers in the period of 2015 -2017 39

Figure 3.4 The SME credit line and loan balance of MSB Bank 41

Figure 3.5 The SME loan portfolio by terms of MSB in the period of 2015 -2017 443

Figure 3.6 The SME loan portfolio of MSB by business sector in the period of 2015 -2017 44

Figure 3.7 The growth rate of Vietnamese economic by business sector 45

Figure 3.8 The change of SME loan utilization of MSB in the period of 2015 -2017 46

Figure 3.9 Reasons for low SME loan utilization in MSB Bank in 2016 47

Figure 3.10 SME credit productivity per RM in MSB Bank from 2015 to 2017 49

Figure 3.11 SME Sale force situation in MSB Bank from 2015 to 2017 50

Figure 3.12 SME sale force employment termination in MSB Bank in 2017 51

Figure 3.13 Nonperforming loan (NPL) ratio of MSB in SME lending from 2015 to 2017 553

Figure 3.14 Risk cost of MSB in SME lending by sectors from 2016 to 2017 53

Figure 3.15 Profitability of MSB in SME lending from 2015 to 2017 54

Figure 3.16 Loan NIM of MSB in SME lending by sectors from 2015 to 2017 55

CHAPTER 1: INTRODUCTION

1.1 Rationale of the research

Nowadays, Small and medium enterprises (SMEs) play a huge role in the economic growth process of many countries or regions, including in developed and developing countries Small and medium enterprises operate in all areas of the national economy from industrial production, construction, trade, services to meet the increasingly diverse and rich needs of consumers In economies with different development characteristics, the role of small and medium enterprises is expressed at different levels But the reality shows that the importance of small and medium enterprises is getting bigger as the scope of activities is increasingly expanded through the number of businesses and activities present in many industries, fields and existences as an indispensable part of each country's economy

First, SMEs create jobs for workers, contributing to reducing unemployment Second, SMEs play an important role in stabilizing and promoting economic growth Third, SMEs exploit and promote local resources, contributing to economic restructuring Fourth, SMEs promote a dynamic economy

In every economy, SMEs are the engine that accelerates economic development through its roles in making income, alleviating poverty, increasing employment, (Altman and Sabato, 2005; Fatoki, 2011, Roman, 2011) According

to declaration of OECD in Ministerial Conference in 2018, SMEs are key element

of the world economy, employing formally more than half of global labor forces and contributing on average between 50% and 60% of national GDP in OECD Member countries which includes all types of economics from middle and low-income countries such as Kazakhstan, Latvia, Vietnam to high income countries like USA, the United Kingdom, Japan Moreover, SMEs also take part in generating innovation and potential exporting opportunities, supporting inter-and intra-regional decentralization (Cook, 2001) Therefore, SMEs have been the objectives of research in many fields including financial aspects (Tucker and Lean, 2003; Berger and Udell, 2006), management (Hutchison and Quintas, 2008)

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Majority researches pointed out that financing play important roles to the existence, expansion of SMEs

It is unquestionable that financing is important for the existence and growth

of SMEs sector via supporting of new business creation, innovation facilitation, promotion of existing business development According to the research of Ardic, Mylenko and Saltene (2012) there was a strong positive correlation between financing SMEs and overall economic development Therefore, a high-functioning financial sector is very important to meet the needs of SMEs Based on Beck (2008)’s research of 91 banks from 45 countries, in bank perspective, SME lending

is potential profitable segment

Vietnam is also no exceptional case According to Economic Credit Department (SBV)1, at August 31st, 2017, the total SME loans of Vietnam banking system was 1,292,182 billion VND, accounting for 21,14% total loans of Vietnamese economic Currently 200,000 SMEs are borrowing from banks Many financial institutions are offering actively many promotion and attractive products

to SMEs In current Vietnamese banking market, Techcombank and VPBank are the two retail commercial banks which have similar business structure with MSB Bank and consider SMEs strategic customers In recent years, SMEs has been considered as one of main segments of VPBank Beside secured loan products, VPBank also has implemented substantially unsecured loan products in order to give more opportunities to SMEs to access bank loan without collaterals On the other hand, in the annual shareholder meeting 2017, Techcombank announced that SME was continuously target segment in line with the guidance of the government MSB Bank (MSB) also spent a great of time and resources in order to compete with other bank in this market Even though, the whole SME business structure of MSB was completely changed to customer orientation since 2014, the business performance didn’t meet expectation The SME loan size of MSB is quite small in comparison with other banks The total outstanding balance of SME segment at year end 2017 of MSB was only around 5,700 billion VND which

1

manh-123724.html

http://tapchitaichinh.vn/nghien-cuu-trao-doi/dau-tu-tin-dung-doi-voi-doanh-nghiep-nho-va-vua-tang-equal to one fourth of Techcombank and one tenth of VPBank Besides that, SME lending interest after deducting fund cost in MSB Bank was still 20% below budget 2017 given by MSB Bank BOD As a result, SME Banking of MSB Bank

is struggling to resolve the problems of slow growth and meet the expectation of MSB Bank BOD and investors

For these reasons, the topic “Analyzing small and medium enterprise lending activities: Case study of MSB Bank” is chosen for this thesis

1.2 Research Objectives

The main objective of this research is analyzing the whole SME lending activities MSB Bank, identify problems and suggesting some solutions, detailed as below:

- Addressing SME lending activities and factors which has great influences to

it

- Analyzing the current situation of SME lending activities at MSB Bank

- Making some suggestions to improve the business performance of MSB in lending SME

1.3 Research questions

- What are SMEs and factors which affects to SME lending activities?

- Statistics on lending performance of small and medium enterprises of MSB

of RMs managing 150 SME customers with the loan utilization under 10%

in the whole country conducted by MSB Bank in 2016

1.5.2 Research Methodology

- Sample 2 people, in which, 1 person is Director of Supper small sized enterprise segment, 1 person is Director of Product Development Center (former SME hub head of Nam Dinh Branch)

- Interview Method: Offline

- Based on the interviews, the author delves into annual research and data analysis to assess the situation and provide solutions to improve SMEs lending activities

- Description: Based on the conducted interviews, the survey of MSB Bank,

report of HR and the observation of the researcher, the current situation of SME lending in MSB Bank was described, inspected and compared to other banks in non-financial aspects such as credit procedures, HR, product

portfolio, etc

- Statistical analysis: By using financial ratios related to productivity,

profitability and risk, the SME lending performance of MSB Bank over 03

years from 2015 to 2017 was analyzed in financial aspects

1.6 Research structure

Basically, the research structure presents a brief summary of the research This thesis includes four chapters Details as below

Chapter One explains the background and rationale for selecting research

area, objectives, scope and methodology

Chapter Two provides literature review on SME lending activities of

commercial banks, contains relevant theoretical frameworks, concepts and points

of view in existing researches in the investigation area

Chapter Three addresses facts findings of SME lending at MSB Bank in

recent years via using the main criteria and significant aspects mentioned in previous chapter for assessment

Chapter Four presents suggestions for SME lending improvement in MSB

Banks and SBV based on the achievements and issues found in the previous chapter

The Conclusion summarizes the level of research aim and objectives,

comprises acknowledgement of limitation of the study and highlights scope for future studies in the same research area

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CHAPTER 2: THE THEORETICAL FRAMWORK ON SME LENDING

ACTIVITIES OF COMMERCIAL BANKS

2.1 Overview of SMEs

2.1.1 Concepts of SMEs

There are many and various concepts of SMEs which are different among countries and statistic reports on SMEs Some common used criteria for benchmarks are sales, the number of employees, value of asset but employment is mostly used In spite of that, there is still diversification in defining the labor size

of SME In fact, there is no general concept of SME which is agreed in all the countries Based on the MSME Country Indicators Database 2014, more than one definition was registered for each country The database includes 267 definitions corresponding to 155 countries2 The variation of SME characteristics in each sector in each country is the main reason for many definitions used in the same country For instance, the Singapore distinguishes definition of local and foreign SMEs, whereas the town and village enterprises are different in China (Harvie and Lee, 2002) According to OECD (2004), the diversification of SME characteristics together with economic and political environment and strategies in each country are responsible for inexistence of common accepted SME definition

The SME definitions have been formally presented in many approaches of governments, national and international statistical institutions in order to differs SMEs from other types of enterprises There are two types of approaches which are quantitative and qualitative approaches The first one is based on measuring the asset size, volume sale, the number of employees, investment (Lee and McGuiggan, 2008) while the second one focuses on illustrative criteria such as flat organization hierarchy and small-scale decentralization (Brytting, 1991) Therefore, generally, SMEs are enterprises whose characteristics meet certain quantitative and qualitative requirements

The qualitative method for determining SME focuses on certain SME characteristics which come from their nature According to Intarakumnerd,

2

MSME Country Indicator Database 2014 analysis

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Chairatana and Tangchitpiboon (2002), the popular qualitative criteria for defining SME are its management type, geographical operation, the independence level However, Keasey and Watson (1993) expressed their concerns about qualitative concepts Accordingly, there were some firms classified as SME in certain sectors due to their operation size, revenue but the similar firms might be owned by large corporates in another sector In order to clear confusion and prevent such issues, the report of Bolton (1971) suggested three economic criteria for SME classification Firstly, the company must get a certain small market share Secondly, it is fully owned or partly owned and managed Thirdly, it is independent and not part of a larger firm Moreover, Trewin (2001) pointed out that characteristics of management and organization should be considered in SME definition These characteristics consisted of the independence in operation and ownership, main control or decision making by owner which accounts for most contributions On the other hand, Brooksbank (1991) gave concerns about the implementation of qualitative method The common issue was the accessibility of qualitative information As a result, in fact, the qualitative method is used more frequently and less cost

According to the quantitative method, quantitative criteria related to SME nature are used to define SME Majority researchers and policy makers usually use this method Based on Brooksbank (1991), its practicability is the significant advantage in comparison with other methods For example, the information about sales, revenue, the number of employees is easily accessible The report of Bolton (1971) advised the SME definition in some sector should be measured by quantitative method instead of qualitative method Furthermore, Curran and Blackburn (2001) believed that this method ensure the simple and objective in SME classification However, there are no agreement standard statistical SME definition criteria Moreover, the SME definitions are varied among countries A firm considered SME in a country may be classified as a large corporate in another countries The common used criteria are based on revenue, sale volume, capital size, labor size Hallherg (2000) mentioned that the employee size and asset value are mostly used Regarding to the number of employees, it is stable, indirectly

affected by economic factors like inflation, the change of exchange rate and less confidential On the other hand, the firm value is more complicated Based on Harper (1984), many SME owner/managers are not willing to publicize the real firm value The report also gave some case which the owners can’t separate their personal property and firm capital In the research of Osteryoung and Newman (1993), the author recommended that criteria for SME definition must be measurable, observable, meaningful, consistent and compatible with market overview

Table 2.1 Examples of quantitative criteria used in defining SMEs in some counties

Source: Buculescu (2013) The SME characteristics represent not only the economic but also cultural and social aspects of one country, which leads to various SME definition in different countries The SME definition of the European Commission (EC) (2009) described that small enterprise is the company which has less than 50 employees

• Type of activity: manufacture or service

• Number of employees (mazimum 500 employess) depending on the types of business activity

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and total annual revenue or total balance sheet less than €10 million whereas medium enterprise is the company which has maximum 250 employees and €50 million annual revenue or €43 million total balance sheet In Japan, the SME definitions regulated in the Small and Medium-size Basic Act are different among various economic sectors

Table 2.2 SME Definition in Japan

In Asia Pacific regional, the most common measure for defining SME is the number of employees Based on the study of Dababneh and Tukan (2007), SME enterprises are the ones with maximum 100 headcount, whereas the number of employees in small company is between 5 and 19; the number of employees in medium company is between 20 and 99 persons included managers The same criteria were used in Middle East and North Africa

Table 2.3 SME Definition in some Middle East and North Africa countries by

In Vietnam, according to Law 04/2017/QH14 on assistance for small and

medium sized enterprises, SMEs are defined as micro, small, and medium-sized

enterprises having no more than 200 employees registered with the state social

insurance scheme in a year and meeting either of the following two criteria:

- The total capital is not greater than 100 billion VND;

- The enterprise’s revenue of the previous year is not greater than 300 billion

VND;

2.1.2 The characteristics of SMEs

Many researches are conducted and majority agreed that in general, in

comparison with large corporation, SMEs have some specific characteristics such

as flexible organization with centralization of decision making (Carrier, 1994),

basic planning process (Atkin and Lowe, 1997) and management practices (Gray

and Mabay,2005), more rely on business partners Regarding of strategy and

decision-making process, SMEs are quickly responsive, short-term and

concentrated on material rather than information process of large corporation

In term of organization structure, SMEs is not as complex as large

corporation Large corporation usually follows hierarchical structure and is

Comment [H1]: Luat ko quy dinh cu the

micro hay small rieng biet

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managed and administered by group of various professional people responding to various operational function such as marketing, financing, production, sales while SME follows direct management Moreover, according to Bolton (1971), despite

of lack of high education qualification, many SMEs manager usually have skills qualification The research of Curran and Blackburn (2001) stated that SMEs were more affected by the market than large firm SMEs’ business performance also depended on changes in the market and their suppliers or distributors Cronje, Du Toi and Motlatla (2004) observed and pointed out some significant characteristics

of SME such as:

- SMEs business have to rely more on labor intensive than large firm

- Small companies often take business opportunities in the restricted and small sized market which are unattractive with large corporations

- SME are the starting stage for entrepreneurial talent and a testing ground for new industries

- The competitiveness of the economic is partly contributed by SMEs

Similarly, Elasrag (2010) also indicated some unique characteristics of SMEs including:

- There is usually no separation between ownership and management in SMEs

- The owner’s assets tend to be used as collaterals for acquiring debts and repaying

- The owner’s objectives make direct influences in the firm’s decision making

In financial aspect, Dababned and Tukan (2007), SMEs is usually funded or funded from family members while large corporation has various ways

self-to raise funds from market and diversifies ownership Business information of SME is less public than large companies so that the interest rate applied for SME

is higher than large companies for covering information collection cost and hidden risks

Overview of Vietnam's research related to the topic

- Le Thi Thanh Thuy (2013), "Developing lending activities for small and medium enterprises at the Global Petroleum Commercial Joint Stock Bank - Ba Dinh Branch, Hanoi", Master Thesis, University of Economics - Hanoi National University Thesis synthesizes theories related to the development of SME customer loans at the Global Petroleum Commercial Joint Stock Bank - Ba Dinh branch, Hanoi On the theoretical and practical basis, the author offers solutions to improve the quality of corporate loans in the credit activities of the Global Petroleum Commercial Joint Stock Bank - Ba Dinh branch The author has proposed a number of solutions such as solutions to supplement evaluation criteria (cash flow indicators), consolidating the financial analysis index system In addition, the author focuses on the group of complete solutions, improving the capacity of the internal banking system such as specialist qualifications, technology systems, customer data storage, and improving competitiveness in searching for customers, SMEs have good finance and reputation in the market These are very effective suggestions not only to help Global Petroleum Commercial Joint Stock Bank - Ba Dinh Branch to develop its SME lending, but also to affect the lending system of the whole Global Petroleum Commercial Joint Stock Bank

- Nguyen Ha Linh (2015), "Loans to small and medium enterprises at Agribank - Lang Ha Branch", Master Thesis, University of Economics - VNU Hanoi

In this thesis, the author studies the general theories about bank lending to SMEs and the quality of bank credit for SMEs The characteristics of a bank's loan, the role of lending, and principles of credit extension are the issues that the author is interested in Based on collected data, through the analysis of credit quality assessment for SMEs, the author gives positive aspects and the limitations in lending activities to SMEs of the bank from which to propose solutions The advantage of this thesis is that the author was interested in the customer factor in loan quality analysis for SMEs Specifically, the author has conducted interviews with deposit and loan customers (related customers, current customers and potential customers of the bank) From the feedback collected, the author assessed

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the level of customer satisfaction with the current services of the bank Also through that, the thesis identifies the impact of this factor on loan quality as well as improving loan quality

2.2 The Criteria of Commercial bank’s lending to SMEs

2.2.1 Concepts and Importance of lending to SMEs

2.2.1.1 Concepts

According to Hanson (1986), commercial bank is defined as an institution which accepts deposits, provides loans and other financial services The main objective of this institution is maximizing profit Moreover, Daiff (1995) stated that a commercial bank is a financial institution which has the role as intermediary between capital and investment In line with other researchers, James D.G (1985) described that commercial bank is a financial institution which offers a wide range

of service such as saving accounts and extension of loans and seeks to operate at a profit

Lending is the main services which bring the most profit for the commercial bank Lending is a relationship of assets (money or goods) between lenders (banks and other financial institutions) and borrowers (individuals, businesses and entities

in the economy), where the lender transfers the property to the borrower within a certain period of time as agreed upon, the borrower shall repay the principal and interest unconditionally to the lender upon maturity

According to the International Monetary Fund’s Gobat3

, banks match up savers and borrowers to help ensure that the economies function smoothly Banks are intermediaries between depositors (who lend money to bank) and borrowers (to whom the bank lends money) of the economic There are various types of loan classification such as loans for individuals or enterprises, loans with or without collaterals, etc SME loans are a type of enterprise loans which is customized to serve the need of SMEs The common classification types for SME loans are by terms and by products

Short term loan is a type of loan with the repaying schedule less or equal a

year By using this type of loan, SMEs can accelerate the number of business cycles in a year

Long term loan is a type of loan with the repaying schedule more than a

year SMEs need this type of loan for expanding the business size such as purchasing machines, building new factories

 By products

Trade finance This is a type of loan related to commerce and international

trade Banks takes a fee from seller to give fund before the credit period ends This bill will be presented to the seller’s customer to collect fund

Funding Working Capital requirements This is a type of loan which bank

lend to enterprises to buy goods/ raw materials based on their business cycle

Fixed Asset purchasing (Equipment or Machinery) This is a type of loans

to serve business expansion of SMEs in various manufacturing sectors

Project Finance This is a type of loan for financing a project proposed by

SMEs

2.2.1.2 Importance of lending to SMEs

 Banks’ perspective

SMEs is the potential profit segment for bank business, which is reflected

by the survey of IFC (2010) Accordingly, after interviewing 91 banks in 45 developed and developing countries, about 82-83% banks expressed that SME market is large and that prospects are good By lending activities, banks established strong relationship with SMEs According to De la Torre, Martinez – Peria and Schmukler (2010), beside funding capital, banks offer a wide range of other financial services related to deposit, settlement, etc Furthermore, there are opportunities for banks to acquire large customers which has relationship with SMEs By this way, the banks can avoid the intension of competing in large customer and individual market

 SMEs’ perspective

Due to their nature, bank lending is an important and convenient source of financing SMEs usually follow a list of sources to raise funds from the cheaper to the

16

costlier sources Besides raising funds from families and friends, small companies consider debt financing a cheap way to acquire funds By this way, it doesn’t affect to the ownership or control of business (Berger and Udell, 2003) On the other hand, information disclosure also causes companies to chose borrowing from banks in order

to avoids leaking information to their competitors or third parties (Rice,1990)

Based on the research of Keasey and McGuineness (1990), with the help of bank lending, SME can achieve better business performance than using other sources for raising funds Under the monitoring and reviewing of banks, the cash flow and fund utilization of companies are more effective The nature of bank lending is based on the principle of repayment of principal and interest over time Therefore, the businesses have to find measures to use capital effectively, increase the business cycle in order to make sure that the rate of return is greater than the interest rate of the bank The bank only lends money to enterprises with effective business plans and good financial status, so that businesses which has intention or are being borrowing from banks must always maintain to be effective Additionally, bank always closely monitors the company's progress and capital use purposes in the right direction as proposed in loan plan Bank lending make companies more transparent and effective via checking periodically

In many developed and developing countries, SMEs segments always contributes significantly to the economic and the sociality through various areas One of important SME role is job creation (Abor and Biekpe, 2007) In USA, based on Edmiston (2007), in the period from 1990 to 2003, firms with less than

20 headcounts were responsible for 80% net new jobs Firms with headcount

between 20 to 499 headcounts took 13.2% of net new job SMEs in Canada also took great part in economic development Based on the research of Ravi (2011), SMEs accounted for 64% employees in private sectors in 2009 and expanding the impact to the economic from 26% GDP in 2000 to 30% GDP in 2008 In the period from 1978 to 1996, Chinese SMEs hired around 230 million local people and provided 50% tax revenue and 58.5% GDP (Shi and Li, 2006) Korcmaros, Takacs and Dowers (2003) stated that Japanese SME generated 78% jobs in the whole country

The second important SME role is income generation (Kuratko,2005) Moreover, in some certain industries like software, marketing and human resources, SMEs have got the dominant positions By this way, SME took crucial roles in increasing the growth rate of economics in many countries According to Ayyagri, Beck and Demirguc-Kunt (2003), in countries with high income, the contribution of enterprises with maximum 250 headcount accounted for 70% jobs and 55% GDP whereas in countries with low income, it accounted for 30% jobs and 15% GDP In countries with middle income, it accounted for 55% jobs and 35% GDP

In European Union (EU), 99.8% of total 20 million active companies in European members were firms with no more than 250 headcounts (Schmieman, 2008) and 83% new jobs created in the period from 1984 to 2004 was coming from SMEs (Spence and Perrini, 2009) In Australia, according to Clark et al (2012), SMEs accounted for 99.7% trading businesses, 57.1% GDP and 70% employees in private sector

2.2.2 Criteria for analyzing SME lending

Traditionally, to assess the business performance, firm usually use financial ratio analysis An efficiency ratio measures a company's ability to use its assets to generate income The efficiency ratio also applies to banks In the context of banking industry, financial ratios can be used to evaluate the efficiency of bank activities The financial ratios are commonly calculated under a number of categories including capital adequacy, profitability, operational efficiency, asset utilization The efficiency of lending activities is measured by the group of criteria

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which indicate the substantial growth of credit customers, loan volume and profit with low risk The common objectives of analyzing are productivity, quality asset, profitability

2.2.2.1 Quantity ratios

A bank usually uses these ratios to measure the growth rate of lending activities They indicate not only the competitive level of the bank in comparison with its competitors but also the transformation level of the customer base to loan volume It helps the bank managers to identify the issues in credit process

 The change of the number of credit customers It displays the increase or

decrease of the number of credit customers over a period of time the higher ratio means that the credit policy of bank is still attractive

The change of the

 The growth rate of credit customers It reflects the growth speed of

customers which have a lending relationship with the bank over a certain period of time This ratio is commonly used by many banks If the ratio increase, it will mean the faster expansion of credit customer base

in year “n-1”

 The change of the total credit line A credit line is the maximum amount

of funds which a bank approves to lend to a credit customer based on the finance need and credit potential of the customer according to bank

assessment The ratio displays the increase or decrease of the total credit

customers over a period of time This ratio corresponds to the change of the number of credit customers, the change of credit policy

The change of the

total credit line =

The total credit line

in year “n” -

The total credit line in year “n-1”

 The growth rate of total credit lines This ratio shows the growth speed of

potential loans generated from credit customer base over a certain period of time It is often used along with the growth rate of loans to analyze the transformations from credit line to loan

in year “n-1”

 The change of total loan balance It reflects the growth speed of loan size

over a certain period of time This ratio is usually used to assess the bank business performance in lending activities

The change of

total loan balance =

The total outstanding balance at the end of year “n”

-

The total outstanding balance at the end of year “n-1”

 The growth rate of loans It reflects the growth speed of loan size over a

certain period of time This ratio is usually used to assess the bank business performance in lending activities

The growth

rate of loans =

The outstanding balance

at the end of year “n” -

The outstanding balance

at the end of year “n-1” The outstanding balance

at the end of year “n-1”

2.2.2.2 Productivity ratios

A bank usually uses these ratios to measure the productivity of sale forces They display the performance of average sale person contributing to the loan growth With their helps, the bank managers can have a overview of sale force quality as well as the gap performance between the old and new RM when comparing the ratio for new RM and ratio for old RM

 Loan utilization This ratio reflects which level credit line transforms into

actual loan The credit line approved by bank is based on the fund needs of customer so that if loan disbursement is too below the credit line, it might imply that the offers of bank doesn’t attract to the customer By this way, it

20

is helpful for the bank managers to measure the customer quality RM brings

to the bank as well as the bond between the bank and the customer

Loan

utilization =

Total outstanding balance of customers which has credit

lines at the end of the year Total credit line which is still effective at the end of the

year

 New credit SMEs customers per RM It shows how many new credit

SME customers a RM can get over a period of time The increase of the ratio means the better productivity of RM in increasing credit customer

The number of new credit SME customers the bank

obtains over a year

The average number of RM in a year

 New credit line per RM It shows how many new credit lines a RM can get

over a period of time The increase of the ratio means the better productivity

of RM in acquiring potential loan

New credit line

Total new credit line approved by the bank obtains over a

year The average number of RM in a year

 New loan per RM It shows how many new loan volume RM can get over

a period of time The increase of the ratio means the better RM performance This ratio may be used in both KPI assessment and budget

 Turnover rate It described the percentage of employees leaving a

workplace Along with the role of measuring the bond between employees

and the organization, this ratio also affects to the growth of business

Turnover rate = The number of employees leaving workplace over a year

The average number of RM in a year

For example: Given

 y is the number of new customers;

 a1 is New customers per RMs working at the bank for over 01 year

 a2 is New customers per RMs working at the bank for under 01 year

 x1 is the number of RMs working at the bank for over 01 year

 x2 is the number of RMs working at the bank for under 01 year

It is easy to see that y =a1*x1+a2*x2 Assuming that a1 and a2 is constrained and the total employees is fixed then the change of y depends on the turnover rate This turnover rate also has similar impact on the growth of new loans

2.2.2.3 Quality ratios

a bank usually uses these ratios to assess quality of customers and loans The main objective is to ensure the sustainability of bank performance in lending

activities

 Nonperforming loan (NPL) ratio A nonperforming loan is a loan which

the debtor has not made scheduled payment for a specific period According

to Stated bank of Vietnam (SBV)4, the overdue of the nonperforming loan

is basically at least 90 days The payment can be interest or principal payment The ratio is used for measuring the loan quality and risk exposure level of lending activities The requirement for NPL ratio regulated by SBV

is below 3% for the whole bank loan

Nonperforming

loan ratio =

Total balance of nonperforming loans at the end of the

year Total outstanding balance at the end of the year

 Risk cost This ratio indicates how much money the bank has to make

provision by lending a unit currency Provision is regulatory term denoting

4

Decision No 493/2005/QD-NHNN promulgating the Regulation on classification of debts, appropriation, setting up and use of reserves for handling credit risks in banking activities of credit institutions

22

reserves created against the possibility of credit losses identified in connection with specific credit assets5 It measures the potential risk cost

the bank has to bear when lending a customer

Risk cost = Total amount of provision bank makes over a year

Total average loan balance over a year

2.2.2.4 Profitability ratios

A bank usually uses these ratios to identify the ability of bank can earn money from a loan The loan income is defined as the lending interest income after subtracting the interest expense of deposit which the bank pays for depositors These ratios also help bank managers adjust lending rate to customers in order to cover deposit expenses and the risk of nonperforming loans and still achieve desirable revenue These ratios can be calculated for product or industry aspects

By this way, the bank manager can choose suitable product or industry for loan expansion

 The change of loan income The ratio reflects the trend of lending profit in

a bank it is under the affection of the change of loan balance and loan net interest margin

The change of loan

 Loan net interest margin (NIM) This ratio is a type of interest margin,

represents how much money the bank can earn by lending after paying deposit expense It measures the bank’s ability of converting loans to revenue It is useful for comparing the profitability among loan products or industries

Total average loan balance over a year

5

BCBS, International Convergence of Capital Measurement and Capital Standards, 2006

2.3 Impact factors for lending SMEs

2.3.1 Internal factors

There are internal factors which have great influence in bank behavior towards lending SMEs, especially related to risk and credit policies, HR polices, loan portfolio management

 Risk appetite

Risk appetite is defined as the amount and type of risk that an organization

is willing to take in order to meet their strategic objectives The bank only lends to borrowers whose risk and profit profile favors to the bank Risk appetite is formed

by loan performance history, industry risk profiles, the amount of secured loan, government regulation and other economic conditions The bank’s lending history and probability of loss debt decide how many funds allocate for lending a specific customer or industry at certain lending rate The higher risk level the higher lending rate for covering credit risks The collateral is also another factor bank considers to decide the amount for lending The different value of collaterals and types of collaterals accounts for different credit line the bank approves for a customer

 Credit policy and procedure

Based on the risk appetite and business objective, the bank establishes lending principles to clarify which type of customer or business sector which the bank can lending money, the limitation for lending a customer or a business sector, credit line calculation and minimum profitability based on customer credit profile, credit procedure The tighten or loose level of credit policy and procedure can affect the decline or expansion of lending activities The credit procedure is the guidance for the responsibilities of departments involving in lending activities If any part of credit process gets issues, it might affect the credit assessment and extent time of credit process As the result, business performance is less efficient

 HR policy

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Human resources policy is the guideline the organization applies in managing its people6 It guides HR managers on various aspect such as recruitment, training, compensation and promotion HR policy can be useful in developing desirable organization culture A good HR policy can help organization in improving sale force quality through recruiting new good employees and training current employees As the result, it is one of fundamental factors for the business performance

 Loan portfolio management

Loan portfolio is the major asset of banks It consists of all types of loans which bank offers to customers It might be divided by types of products or lending business sectors Based on the report of Comptroller of the Currency Administrator of Nation Bank (1998), loan portfolio management is the process which can control and manage the inherent risk of credit process Normally, the loan portfolio is the main source of generating revenue and risk It includes how to optimize business opportunities and bring great profit while keeping safety of the financial institution

One of tool to optimizing loan portfolio is Liner optimization According to Offei (2011), it can be used in researching as well as business planning Generally, its role is optimizing a subject under certain condition of constrains which have influence to the subject Donkor (2013) used liner program as tool to maximize the loan profit of Capital Rural Bank Limited, Dominanse – Agency (Sunyani) Based

on Wu (1989) report, it can be used for solving optimization issues such as maximizing business result with limited resource or minimizing the resource expenses to achieve fixed business result

The basis of the liner optimization is the method of identifying a way to get the best outcome under certain requirement which in linear relationship Assuming

a function f(x) is restrained by the equation g(x) ≤ 0, the liner optimization is used

to identify the value of x in order to optimize the value of f(x) and still satisfy the equation g(x) ≤ 0

6

Michael, Armstrong (2001) A Handbook of Human Resource Management Practice

2.3.2 External factors

In this thesis, the PEST model was used in order to give overview of SME lending infrastructure It consists of Political – legal, Economic, Social – Cultural and Technological aspects In addition, there are another external factors

 Political– Legal framework

Political environment has certain influence to bank and SMEs operations In

a stable political environment, SMEs can get better business performance as well

as more opportunities to expand businesses Hence, the need of borrowing from banks will increase According to many researchers such as Haselmann & Watchtel (2010), Qian & Strahan (2007), SMEs face the main difficulties in legal framework rather than other aspects Berger and Udell (2006) stated that one of legal factors impacting lending is commercial laws related to poverty rights in a commercial transaction and financial laws Based on those laws, banks can clarify requirement conditions in credit contracts such as collaterals and other guarantees for loans

Tax and regulation factors also affect directly SME’s ability of getting loans from banks The tax rate can be adjusted higher or lower, which has impacts to business expense and profitability of SMEs By this way, banks can reconsider to whether lend to SMEs or not and change the approved credit line Regulation related to bank system can be tightened and restricted in lending some business sectors or lending limitation due to bank capital requirement

 Economic aspect

The economic cycle has strong influence in bank operation in general and lending activities in particular as well as SME business activities In the context of stable and growing economic, the rise of fund demand from SME makes the loan volume of bank increase while the credit risk can be decrease In contrast, when the economic faces crisis, the resisting ability of SMEs from negative business impacts is low, which lead to the increase of nonperforming loans

Another factor affected to lending SMEs is information infrastructure in the economic The bank lending decision depends mainly on collected financial information If the financial statement is not transparent and accurate about SME

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business performance, the financial ratio used by the bank in reviewing credit profile will not reliable The growth of independent accounting or auditing firms are necessary for covering risks rising from this issue Moreover, the existence of credit bureaus or information companies provides credit or payment history of enterprises which help banks get overview of credit status of customers According

to Miller (2003), the credit bureaus reduces cost and time in loan process and credit risk

 Social – Cultural aspect

The socio-cultural aspect has impact on the borrower's morale A fundamental nature of a loan is based on trust Deceiving customers is people who

do not want to pay or cannot afford to repay debt lead to credit risk to the bank Hence, the morale of the borrower is the basis for the bank to continue to develop loans to its clients The characteristics of the culture also affects to the lending decisions For example, in masculine culture, firm owned by female usually has to overcome more strict credit requirement than males (Bellcucci, Borivo and Zazzro, 2009) In the society with the existence of discrimination, the bank assessment is also affected when the loan is requested by minority groups such as Asian, Black Africans (Blanchard, Zhao and Yinger, 2008)

 Technological aspect

Technology is a major factor for accelerating the development of both bank and SMEs According the report of Smallbone & Welter (2001), technology has great impact on production cost and firm growth On the other hand, due to the technology development, SMEs are required to request more asset purchasing loans from bank to match up with the competitors

Moreover, technology is essential factor supporting bank operation through data processing, information storing and communication With the help of technology advances, the banks can apply many lending assessment methods such

as credit scoring or online peer to peer lending which reduce processing time and more reliable result Credit scoring is automatic assessment method using historical data and identify possibility of nonperforming loan Online peer to peer

method is a type of online platform which connecting borrowers and lending via auction It replaces bank as the intermediary in lending process

 Competitor:

Commercial banks operating in the environment have many competitors Competition is a good motivation for the Bank to improve, because in order to grow, the Bank must always try not to lag behind its competitors and to improve and enhance its activities I overcame the competition However, customers have their choice when sending money, using the service and borrowing from the Bank which benefits them If the competitor is more dominant than the Bank, it will attract more customers than the Bank, even the Bank's customers will switch to competitors Therefore, in order to expand lending activities, it is very important to research and understand competitors to become more and more dominant

The process of analyzing competitors includes: identifying sources of information about competitors, analyzing such information, predicting competitors' strategies and evaluating the Bank's competitiveness in expanding lending activities

 Customer:

According to the Bureau of Business Administration Registration, in 2017 there were 126,859 newly established enterprises and 26,448 units returned to operation The annual growth of new businesses, due to not much experience, young businesses lead to high demand for credit, but low reputation in the market

as well as the ability to maintain and develop Business is relatively difficult At the same time, the majority of customers want to receive good products, best services, low prices and low interest rates

All of these factors are important factors affecting the lending activities of the bank

 Financial information

It is hard to imagine a business in an environment that is constantly changing and fiercely competitive today without information Information becomes an essential and indispensable issue for all businesses in general and commercial banks in particular In lending activities, the Bank lends mainly to the

If a bank captures timely economic, social, and market information, the bank will provide general business activities and appropriate lending activities Accurate customer information, bank lending to each customer will be more reasonable and proactive That will help the Bank not to miss out on many good lending opportunities and at the same time limit the risks for its loans

Conversely, if the information is not timely and accurate, the Bank will lend unreasonably Lending too low will limit the production capacity of enterprises because the amount of loan capital is not enough for businesses to invest comprehensively But if the loan is too high compared to the demand and solvency

of the customer because the information about this customer is good when in fact it

is not so, so when the customer makes a loss will not be possible ability to pay off debts

In fact in Vietnam, access to accurate, timely and adequate information is difficult And the ability to lend is still limited

 Informal Finance:

When small and medium enterprises have demand for capital Funding usually comes from both formal and informal sources

- Formal source: Bank loan

- Informal source: It is a source of loans which not regulated by the State Bank, such as borrowing from family members (father, mother, sister, brother), friends, share holder, small groups, taking part in a tontine, borrowing Women's union, black credit, etc …

The main reason for SMEs often finding informal loans is because:

+ Enterprises with small scale should not meet the criteria to screen customers of banks such as: Revenue must be greater than or equal

to twenty billion, profit must be greater than zero…

+ The business owner does not have collateral, or the collateral does not meet the criteria for mortgage, such as: Alley less than 1.2m, land under planning, disputed land

+ Small businesses so there is no credit history to assess corporate reputation

+ Small businesses, accountants often outsource so the accounting record system has many errors

CHAPTER 3: FACT FINDINGS OF SME LENDING AT MSB BANK

30

Address 54A Nguyen Chi Thanh St., Lang Thuong Ward,

Dong Da Dist., Ha Noi, Vietnam

Geographical distribution 1 Head office, 56 branches, 208 Transaction offices

covering 38 cities and provinces

3.1.2 History and Milestone

MSB Bank has a long history of development It was established on 8th June 1991 and officially started doing banking business on 12th July 1991 At the beginning, MSB Bank only had 24 shareholders with charter capital of VND 40 billion and several branches in big cities such as Hai Phong, Hanoi, Quang Ninh and Ho Chi Minh City

In 2005, the MSB Bank head office moved to Hanoi and it only had 16 transaction offices However, in 04 years after that, MSB Bank had a huge transformation It had charter capital of VND 3000 billion and expanded the network of transaction offices from 16 to 100 offices Moreover, it hired McKinsey, a famous consulting company in the world, to create development strategy and help MSB Bank build a new organization strategy

In 2010, MSB Bank raised chartered capital up to 5,000 billion VND and launched new brand identity, new logo with the impressive combination of two colors: red and black to re-identify franchise in banking industry The number of branches and transaction offices reached 144 nationwide Just one year later, MSB Bank’s chartered capital up was to 8,000 billion VND MSB Bank was successful

in connect to the global system of Master Card company

In 2014, MSB Bank launched Community Banking and financial service Business Model and Consumer Loan Model

In 2015, MSB Bank officially merged with Mekong Development Bank (MDB), becoming one of the five largest joint stock commercial bank in Vietnam

in term of branch network and chartered capital Total asset and chartered capital reached VND 104,311 trillion and VND 11,75 trillion respectively with shareholder’s equity of almost VND 14 trillion The network has grown to 270

transaction point and almost 500 ATM reaching 1,3 million individual customers and 30,000 corporate and financial institution customers

Vision and strategy

In line with the vision of becoming the best joint - stock commercial bank in Vietnam, MSB has set forth a mission which is to build a bank that is so good that everybody wants to join and no one wants to leave

Based on three core strengths of the bank: large capital base, extensive network of branches and friendly, united team, our fundamental strategy is to leverage core strengths to deliver the best experiences to customers, shareholders, suppliers, community and staff in everything we choose to do

With clear vision and strategy, we have been focusing on embedding core values into our daily activities This is one of important tasks in our journey to establish a professional, friendly, transparent and high performed corporate culture in MSB This corporate culture will be a solid foundation to support of fast - paced and sustainable growth in the years to come

Solid foundation, sustainable growth going forward

MSB is striving to build a convenient - reliable - friendly transaction bank, which stays on top of customer’s mind for our excellence in the delivery of various tailored financial services, products, and fulfillment of demands by segments ranging from retail customers in both rural and urban areas, to small - and - medium enterprises, and to large corporate and financial institutions

MSB bank has relentlessly invested in the upgrade of technology platform, improved product and service quality on the basis of understanding customer’s demands; developed of human resources, created a professional and high-performance working environment and especially focused on the formulation of international standard-based bank and risk governance model to ensure the sound and sustainable growth

Currently, with a network of nearly 300 branches and transaction offices, and almost 500 ATMs across the nation, MSB has fully provided universal outstanding finance-banking products and services, and garnered the trust of over 1.8 million retail customers, 40,000 SME customers

32

MSB Bankk firmly believe that the solid principle strengths, clear strategic orientations supported by the leadership of experienced and dedicated senior management, both local and expatriate, together with young, dynamic, professional employees will enable MSB to outperform in whatever we do to bring about the best experiences for customers and partners, taking us closer to the vision of becoming the best joint stock commercial bank in Vietnam

3.1.3 Business model and organizational structure

In order to grow sustainably, MSB Bank’s objectives are superior products, outstanding customer services, an extensive branch network, sound financial capacity, and an efficient working environment The corporate governance system

is an important factor in building these advantages