Some solutions to enhance the performance of capital utilization in petrovietnam finance corporation pvfc

CHAPTER 1: LITERATURE REVIEW ON THE PERFORMANCE OF CAPITAL UTILIZATION IN FINANCE COMPANY 1.1 Introduction to finance company 1.1.1 The definition and classification of finance companies

VIETNAM NATIONAL UNIVERSITY, HANOI

HANOI SCHOOL OF BUSINESS

MASTER OF BUSINESS ADMINISTRATION THESIS

SUPERVISOR: DR NGUYEN VIET DUNG

HANOI - 2012

CHAPTER 1: LITERATURE REVIEW ON THE

PERFORMANCE OF CAPITAL UTILIZATION IN FINANCE COMPANY

1.1 Introduction to finance company

1.1.1 The definition and classification of finance companies

1.1.2 The role of finance companies

1.1.3 The major activities of finance company

1.2 Improve the performance of capital use in finance companies 1.2.1 Definition of capital efficiency

1.2.2 The needs to improve the performance of capital use in finance companies

1.2.3 Assessment on the performance of capital use in finance company

1.3 Factors affect the performance of capital use in finance company 1.3.1 The impacts of State policies and regulations

1.3.2 Impacts of the development strategies and mechanism of the parent company

2.2 Assessment on the performance of capital utilization in PVFC 2.2.1 Assessment of capital mobilization activities

2.2.3 Analysis of performance indicators of capital efficiency

2.3 Achievements, limitations and causes

3.2.2 Solutions to improve the performance of credit activities

3.2.3 Solutions to improve the performance of financial investment, project investment

3.3 The overall solutions for PVFC

3.3.1 Investment, innovation, improvement in banking technologies3.3.2 Improve the capability of assets- liabilities management

3.3.3 Enhancing the capacity of the internal control system

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SOME SOLUTIONS TO ENHANCE THE

PERFORMANCE OF CAPITAL UTILIZATION IN PETRO VIETNAM FINANCE CORPORATION (PVFC)

Phan Thu Ha MBA candidate, 2009-2011 Hanoi School of Business – Vietnam National University, Hanoi

Supervisor: Dr Nguyen Viet Dung

August 2012

INTRODUCTION Necessity of the thesis

Vietnam has been shifting from the centralized economy towards the market economy and continues its integration into the global economy The development and utilization of financial resources plays an important role in developing Vietnam economy The establishment of financial intermediaries including finance companies in recent decades has contributed significantly to provide

a more efficient allocation of capital, channeling the capital from people who lack of effective investment opportunity to the person who are capable of investing such capital resource to produce goods and service in a more effective way

Regarding the development of economy, it should be aware of the strong development and contribution of State economic groups that are engaged in multi-sectors businesses However, together with the development and expansion of those businesses, there is a big question of how to mobilize and utilize the capital resources effectively As the result, this leads to the establishment of finance company under the State economic groups to facilitate the capital

Among the continuously fluctuated situation of global finance, with the purpose of conducting the research on the operations of mobilizing and using capital of PVFC as well as figure out some practical solutions to promote its performance in order to contribute

to the development of PetroVietnam, I choose the topic “Some solutions to enhance the performance of capital utilization in Petro

Vietnam Finance Corporation (PVFC)”

Research aim and objectives

The overall aim of the study is to analyze and assess the current practices of capital utilization and to make suggestions to enhance the performance of this operation in PVFC The thesis aims to achieve the following objectives:

(1) Systemize the theoretical framework of finance companies in general and the capital utilization in particular In addition, a set of

Scope of the research

The overall business performance of a finance company is a broad topic Therefore, this thesis only focuses on the performance of capital utilization in PVFC from year 2008 to year 2011, including three main activities that directly related to the topic, which are the capital mobilization, credit activity, and investment activity in order

to develop suggestions and recommendations to enhance the performance of capital use in PVFC

Research methodology

The main sources of data are selectively collected from secondary sources including both local and foreign materials such as data collected from the researched company, from other banks, books, internet, magazines, science reviews, and related journals

The methods applied in this study include: logical reasoning combined with historical materialism, quantitative and qualitative analysis, statistic method, comparison method, economic analysis, method of synthesizing to evaluate the performance of capital utilization in PVFC

Significance of the research

This thesis identifies numerous weaknesses in the current utilization

of capital in PVFC; helps PVFC recognize and have further actions

in solving its shortcomings

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This thesis has proposed some practical solutions in order to enhance the performance of capital use in PVFC case which is the foundation for the improvement in the capital allocation among PVN and its members

Based on the same business environment and same operating models, other finance companies under the State economic groups are suffering the same issues as PVFC Therefore, the recommendations for PVFC provided in this thesis can be seen as a practical case study for other finance companies to consider and apply into their businesses

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CHAPTER 1: LITERATURE REVIEW ON THE PERFORMANCE OF CAPITAL UTILIZATION IN FINANCE COMPANY

1.1 Introduction to finance company

1.1.1 The definition and classification of finance companies

Finance company is a form of non-bank financial institution with the function of using the financial sources including its own capital, customer deposits and other funds for the purposes of lending, investment, providing advisory services in finance, monetary fields,

as well as perform some other services as prescribed by law, but are not allowed to provide the payment service or receive deposits with term of less than 1 year as a commercial bank

Classification by business activities, finance companies can be

divided into three main types as follows: First, sale finance company;

Second, consumer finance company; Third, business finance

company

Based on the relationship of ownership, Finance companies are

divided into independent finance company and finance company established by economic groups

1.1.2 The role of finance companies

The role of the finance company for the economy in general

In short, finance company is a financial intermediary in the economy market, despite some limitations compared to commercial banks, for the market economy, finance companies play an important role as follows:

Firstly, finance companies generate capital for investments to

develop the economy based on their advantages

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Second, through the credit activities, finance companies facilitate the

sustainability and expansion of businesses of all economic sectors

Third, finance companies strengthen the development of securities

markets

Forth, finance companies also play the role as an important channel

for capital flows of foreign investment

The role of finance companies in economic groups

First, the establishment of finance companies in economic groups

helps expand business operations, diversify businesses, reduce risk and generate new source of revenues

Second, the establishment of finance companies under economic

groups assists those groups in seeking and mobilizing external funding channels

Third, the establishment of finance companies helps holding

companies effectively manage the optimal capital

Fourth, the establishments of finance companies help parent

companies to harness the power on the financial and monetary market

Fifth, the establishment of finance companies in economic groups

helps facilitate activities of the group towards a systematic, centralized and uniform orientation

1.1.3 The major activities of finance company

1.1.3.1 Mobilization activities

1.1.3.2 Activities of capital utilization

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a Lending

Based on forms of loans, lending activities include: Advances to

customers; Overdraft; Commercial paper discounting

Based on the types of borrower, lending activities include: Business

loans; Loans to consumers; Loans to other credit institutions; Loans

to parent company and member companies

Based on the loans’ term, lending activities are divided into:

short-term, medium-short-term, and long-term loans

“The effective use of capital in credit institutions in general and

finance companies in particular are assessed in terms of financial

performance as the result of capital activities, reflecting the correlation between the financial performance and the total capital use, represented through the use of resources, governance capacity, financial capacity and the level of risk control on the financial activities”

1.2.2 The needs to improve the performance of capital use in

finance companies

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By improving the efficiency of capital use, the finance company can:

employees

1.2.3 Assessment on the performance of capital use in finance

company

1.2.3.1 The criteria for evaluating the performance of capital use in finance company

Profitability indicators

ROA and ROE are two commonly-used indicators to measure the

efficiency of capital use in financial intermediaries in general and finance companies in particular

Net interest margin (NIM)

Net Interest Margin (%) = (Interest incomes – Interest expenses)/ Average Earning Assets

Interest incomes

Interest incomes = interest incomes from credit activity + interest incomes from deposits + interest incomes from investment securities

Interest expenses

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Total interest expenses within the period = interest expenses for deposits + interest expenses for borrowings

Provision for losses

Provisions for losses are established to cover operating losses in finance companies, such as credit risk, interest rate risk, foreign exchange risk, operational risk

1.2.2.2 Assessment on the management capability of the risks

affecting the activities of capital use

Credit risk: Credit risk is revealed in the case of finance companies

facing difficulties in collecting the full principal and interest of the loans or the principal and interest payments doesn’t properly match the maturity

The indicators that reflect the assessment of credit risk include:

(1) Overdue loans and the overdue loans to total loans rate

(6) Operating environment of the borrowers

Interest rate risk

Interest rate risk is the risk that a finance company are subject to where there are fixed-rate loans but the mobilization rates fluctuate,

it means that the interest incomes remain unchanged however the interest expenses increase according to the change in the market rates

Liquidity risk

Finance company are also concerned about the danger of not having sufficient cash and borrowing capacity to meet deposit withdrawals,

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loan demand, and other cash needs Liquidity risk of finance company in economic group arises when debts come to due and the company is requested to make instant payment to numerous debts while the cash reserves of the company remained at low level Loan - to - deposit ratio (LDR) is one of the ratio to assess the security level of assets

Capital risk

Capital risk in finance company is exposed where the owner capital does not sufficiently compensate for the deposits of the customers and creditors when facing operational risk

CAR is a fundamental measure for managers to assess the financial reliability of the finance company

Environmental risks

Including the legal risk, economic risk, and risk of competition

1.3 Factors affect the performance of capital use in finance company

1.3.1 The impacts of State policies and regulations

The role of state management influences the overall activities of finance company in general and the capital use activities in particular through the formulation, maintenance and promotion of and socio-economic and legal environmental needed to support financial intermediaries operate efficiently

1.3.2 Impacts of the development strategies and mechanism of the parent company

Business Strategy

Based on the development strategy of the parent company, the finance company takes initiative to identify and select their own business strategy in accordance with the environment and specific

1.3.3 The internal factors of the finance company

1.3.3.1 The level of technology development

Technology is an essential platform if any credit institution wants to develop new products Accompanying with the technology is a complete system of internal control and administration, decision-making; this is a determinative factor to the viability of a financial institution

1.3.3.2 The level of corporate governance and control system

Corporate governance is general a series of relations between board

of management, board of director, shareholders and other stakeholders within a business Corporate governance is a mechanism to identify the target of enterprise, tools to achieve those objectives and monitoring the performance If the company is properly organized, the decision making process will be shortened, and still minimize the imprecision, ensuring both operational security and better customer services, thereby improving the quality of capital use’s performance

1.3.3.3 Capacity of human resources

People are always crucial to the success or failure of any organization As the businesses become increasingly sophisticated,

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the requirements of human resources are increasingly elevated accordingly

1.3.3.4 Company policy for capital utilization

In the policy for capital utilization, the credit policy plays the most essential role because this is the core activity, however contains greatly potential risks

CHAPTER 2: ASSESSMENTS ON THE PERFORMANCE OF CAPITAL UTILIZATION IN PVFC

2.1 Overview of PetroVietnam Finance Joint Stock Corporation (PVFC)

2.1.1 Company introduction

PetroVietnam Join Stock Finance Corporation (PVFC), a banking financial institution, previously known as PetroVietnam Finance Company, was founded in June 19, 2000 to contribute significantly for the vigorous development of PetroVietnam PVFC was established with the principal function of providing the fund arrangement to the Group’s members, effectively use and maximize the profit of the industry’s finance resources

non-2.1.2 Scope of business

Capital mobilization

Credit activities: provide loans; discounting, re-discounting and pledging commercial paper and other short term valuable papers; providing guarantee

Other business activities

2.1.3 Business performance of PVFC in recent years

2.1.3.1 Asset size and structure

2.1.3.2 Structure of liabilities and owner’s equity