Credit expansions to SMEs at techcombank trung yen branch

Indicators that impact on the ability to the expansion of credit to SMEs in commercial banks...17 CHAPTER 2.SITUATION OF CREDIT EXPANSION FOR SMALL AND MEDIUM ENTERPRISES SMEs AT TECHCOM

Firstly, I – the author of this graduation thesis wish to express my gratitude to

my instructor, Nguyen Thu Thuy, MSc who have been abundantly helpful andoffered invaluable assistance, support and guidance to finish this graduation thesis.Secondly, I am grateful to all lecturers of Finance and Banking Faculty ofForeign Trade University for their untiring efforts in my professional growththroughout 4 years I studied at the university

Thirdly, I also would like to send special thanks to the officers of Techcombank– Trung Yen branch, who had kind concerns and considerations in regard toacademic requirements and valuable reference documents

Last but not least, I wish to express my sincere thanks to my beloved familyand friends for their understanding and encouragement through the duration of mystudies

Sincerely,Hanoi, June 2013Student

Do Nhu Trang

TABLE OF CONTENT

CHAPTER 1 OVERVIEW OF EXTENDING CREDIT TO SMES IN

COMMERCIAL BANKS 3

1.1 Overview of commercial banks 3

1.1.1 Concepts of bank and commercial bank 3

1.1.2 Functions and roles of commercial banks 3

1.2 Overview of small and medium enterprises 5

1.2.1 Concepts of SMEs 5

1.2.2 The role of SMEs in the economy 7

1.2.3 Major types and sources of SMEs’ capital funds 8

1.3 Credit activities of commercial banks to SMEs 10

1.3.1 The essentials of commercial banks’ credit to SMEs 10

1.3.2 Types of loans for SMEs in commercial banks 11

1.3.3 Roles of commercial banks’ activities to SMEs 13

1.4 Extending credit to SMEs in commercial banks 14

1.4.1 Views on expanding credit to SMEs from commercial banks 14

1.4.2 The necessary of extending credit to SMEs 14

1.4.3 Factors that impact on the expansion of credit to SMEs 15

1.4.4 Indicators that impact on the ability to the expansion of credit to SMEs in commercial banks 17

CHAPTER 2.SITUATION OF CREDIT EXPANSION FOR SMALL AND MEDIUM ENTERPRISES (SMEs) AT TECHCOMBANK - TRUNG YEN BRANCH 20

2.1 Introduction to Techcombank – Trung Yen branch 20

2.1.1 General information 20

2.1.2 Business operation of Techcombank from 2010 to 2012 22

2.2 Current situation of credit activities to SMEs at Techcombank - Trung Yen 28

2.2.2 Current situation of credit activities to SMEs at Techcombank - Trung Yen

branch 32

2.3 Assessing credit activities to SMEs at Techcombank – Trung Yen branch 34

2.3.1 Achievements 34

2.3.2 The limitations of credit expansions to SMEs of the banks and the causes .35

CHAPTER 3 SOLUTIONS TO EXPANDING LENDING TO SMES AT TECHCOMBANK - TRUNG YEN BRANCH 39

3.1 The essentials of extending credit to SMEs at Techcombank – Trung Yen branch 39

3.1.1 Small and medium enterprises development orientation in Vietnam 39

3.1.2 General development orientation of Techcombank – Trung Yen branch 41

3.1.3 Orientation of credit expansion to SMES at Techcombank – Trung Yen branch 43

3.2 Solutions to credit extension to SMEs at Techcombank – Trung Yen branch 44

3.2.1 Develop flexible policies for customers 44

3.2.2 Developing an appropriate supportive credit policies for SMEs 46

3.2.3 Awareness of clientele, change in marketing to clients: 49

3.2.4 Strengthen advisory role, creating close relationships between SMEs and the bank, forming specialized lending division for SMEs 50

3.2.5 Simplification of loan applying procedures: 51

3.2.6 Diversification of credit activities for SMEs 52

3.2.7 Developing a marketing strategy with the goal of attracting SMEs 53

3.2.8 Improving the quality of credit appraisal for SMEs 54

3.2.9 Good organization in term of raising capital in order to ensure meeting the borrowing needs of customers 57

3.2.10 Enhance the work of staff 59

3.2.11 Strengthening consultancy for SMEs 60

3.3.1 Recommendations for the Government and Ministries 60

3.3.2 Recommendation for Techcombank 61

3.3.3 Recommendations for SMEs 62

CONCLUSION 66

LIST OF ABBREVIATIONS

2 Techcombank Vietnam Technological and Commercial Joint- stock Bank

3 CAR Capital adequacy ratio

4 NIM Net interest margin

7 USD United Stated Dollar

9 ROE Return on equity

10 WTO World Trade Organization

11 MSE Micro and small enterprise

12 VCCI Vietnam Chamber of Commerce and Industry

13 GDP Gross Domestic Product

1 List of figures

Figure 2.1 Income structure of Techcombank in 2010 – 2012 23Figure 2.2 Capital mobilizing situation of Techcombank in 2010 –2012 25Figure 2.3 The deposit mobilization structure over the years 26

Figure 2.4 The loans allocation by industry segment of Techcombank 28

2 List of tables

Table 2.1 The number of SMEs, loans and loan ratio of SMEs 32

Table 2.2 Delinquency and delinquency rate of loans to SMEs

1 The necessity of the research

In recent years, following the general trend of the world, SMEs have beenincreasingly playing an important role in the growth of economic In fact, SMEsmodel, which is appropriate for the multi-commodity economy, allowingexploitation and efficient use of all potentials and resources of the country: capital,labor, technology, resources, etc., should be encouraged to develop in the currentperiod of economic innovation

Currently, SMEs are facing many difficulties, especially in term of capital.Businesses cannot rely only on their own equity, they need to have external funds toexpand production and increase business competitiveness Therefore, in order to helpSMEs, the banks need to be the one who help them meet the needs of capital quicklyand promptly

However, in recent years, activities of small and medium enterprise lending inTechcombank - Trung Yen branch have been still under development This not onlyaffects the profit of the bank for not exploiting a huge market of small and medium-sized enterprises, but also limits the SMEs’ access to the bank credits Therefore theresearch of: "Credit expansions to SMEs at Techcombank - Trung Yen branch" isneeded in order to support for the development of the economy of Vietnam

2 Purpose of the research

Based on the reality of credit activities at Techcombank, this thesis analyzes theresult and points out the achievements and existed limitations and from thosesuggested some development solutions

To obtain the above target, the thesis solves the following basic tasks:

 Generalize basic theory about credit activities of commercial banks

 Present an overview of real situations of credit activities at Techcombank

 Suggest some solutions to improve the efficiency of credit activites atTechcombank

3 Research objectives and scopes

 Lending activities in commercial banks

 Analyze and assess the credit extension to SMEs Techcombank - TrungYen branch

 Extending credits to SMEs at Techcombank - Trung Yen branch

4 Research methodology

Research taken in Techcombank - Trung Yen from 2010 to 2012

The project has been using a number of methods: methods of analysis,synthesis, comparison and the accompanying tables illustrate system

Chapter 3: Solutions to extending credit to SMEs at Techcombank – TrungYen branch

CHAPTER 1 OVERVIEW OF EXTENDING CREDIT TO

SMES IN COMMERCIAL BANKS

1.1 Overview of commercial banks

1.1.1 Concepts of bank and commercial bank

A bank is a financial institution and a financial intermediary thataccepts deposits and channels those deposits into lending activities, either directly orthrough capital markets A bank connects customers that have capital deficits tocustomers with capital surpluses Due to their influence within a financialsystem and an economy, banks are generally highly regulated in most countries.Most banks operate under a system known as fractional reserve banking where theyhold only a small reserve of the funds deposited and lend out the rest for profit Theyare generally subject to minimum capital requirements, which are based on aninternational set of capital standards, known as the Basel Accords

A commercial bank (or business bank) is an institution which accepts deposits,makes business loans and offers related services Commercial banks also allow for avariety of deposits accounts, such as checking, savings and time deposits Theseinstitutions are run to make a profit

According to Article 4, Section 2 and 4, Law on Credit Institution of Vietnam,

“Bank means a type of credit institution which may conduct all banking operationsunder this Law Based on their characteristics and operation objectives, banksinclude commercial banks, policy banks and cooperative banks.” and “Commercialbank means a type of bank which may conduct all banking operations and otherbusiness activities under this Law for profit.”

1.1.2 Functions and roles of commercial banks

 Functions of Commercial Banks

Commercial bank being the financial institution performs diverse types offunctions It satisfies the financial needs of the sectors such as agriculture, industry,trade, communication, etc That means they play very significant role in a process of

economic social needs The functions performed by banks are changing according tochange in time and recently they are becoming customer centric and widening theirfunctions Generally the functions of commercial banks are divided into twocategories viz primary functions and the secondary functions The following chartsimplifies the functions of banks.

 Primary Functions of Commercial Banks

Commercial Banks performs various primary functions some of them are givenbelow:

1 Accepting Deposits : Commercial bank accepts various types of deposits from

public especially from its clients It includes saving account deposits,recurring account deposits, fixed deposits, etc These deposits are payableafter a certain time period

2 Making Advances : The commercial banks provide loans and advances of

various forms It includes an overdraft facility, cash credit, bill discounting,etc They also give demand and demand and term loans to all types of clientsagainst proper security

3 Credit Creation: It is most significant function of the commercial banks.

While sanctioning a loan to a customer, a bank does not provide cash to theborrower Instead it opens a deposit account from where the borrower canwithdraw In other words while sanctioning a loan a bank automaticallycreates deposits This is known as a credit creation from commercial bank

 Secondary Functions of Commercial Banks

Along with the primary functions each commercial bank has to perform severalsecondary functions too It includes many agency functions or general utilityfunctions The secondary functions of commercial banks can be divided into agencyfunctions and utility functions

a) Agency Functions: Various agency functions of commercial banks are

1 To collect and clear cheque, dividends and interest warrant.

2 To make payment of rent, insurance premium, etc

3 To deal in foreign exchange transactions

4 To purchase and sell securities

5 To act as trusty, attorney, correspondent and executor

6 To accept tax proceeds and tax returns

b) General Utility Functions: The general utility functions of the commercial banks include

1 To provide safety locker facility to customers

2 To provide money transfer facility

3 To issue traveller's cheque

4 To act as referees

5 To accept various bills for payment i.e: phone bills, gas bills, water bills, etc

6 To provide merchant banking facility

7 To provide various cards such as credit cards, debit cards, Smart cards, etc

1.2 Overview of small and medium enterprises

1.2.1 Concepts of SMEs

Small and medium enterprise (SMEs, small and medium-sizedbusinesses, SMBs and variations thereof) are companies whose personnel numbersfall below certain limits The abbreviation "SME" is used in the European Union and

by international organizations such as the World Bank, the United Nations andthe World Trade Organization (WTO) In most economies, smaller enterprisesoutnumber large companies by a wide margin SMEs are said to be responsible fordriving innovation and competition in many economic sectors

For example in Europe, EU member states have had individual definitions ofwhat constitutes an SME For example, the definition in Germany had a limit of

Commission said it would open a consultation on the definition of SMEs in 2012 InEurope, there are three broad parameters which define SMEs: micro-entities arecompanies with up to 10 employees; small companies employ up to 50 workers,whilst medium-sized enterprises have up to 250 employees SMEs are also defined

as firms with either revenue (turnover) of €10–50 million or a balance-sheet total of

€10–43 million

In the United States, the Small Business Administration sets smallbusiness criteria based on industry, ownership structure, revenue and number ofemployees (which in some circumstances may be as high as 1,500, although the cap

is typically 500) Both the US and the EU generally use the same threshold of fewerthan 10 employees for small offices (SOHO)

In India, the sizes of enterprises are defined as follow:

 Micro-enterprise

A micro-enterprise is one where the investment in plant and machinery (theiroriginal cost excluding land, building and items specified by the Ministry of SmallScale Industries in its notification No S.O 1722(E) dated October 5, 2006) does notexceed Rs.25 lakh

The definition of MSMEs in the service sector is:

 Micro-enterprise: Investment in equipment does not exceed Rs.10 lakh

 Small enterprise: Investment in equipment is more than Rs.10 lakh but doesnot exceed Rs.2 crore

 Medium enterprise: Investment in equipment is more than Rs.2 crore but doesnot exceed Rs.5 crore

The Indian micro and small enterprises (MSEs) sector plays a pivotal role inthe country's industrial economy It is estimated that in value, the sector accounts forabout 45 percent of manufacturing output and about 40 percent of total exports Inrecent years, the MSE sector has consistently registered a higher growth rate than theoverall industrial sector The major advantage of the MSE sector is its employmentpotential at a low capital cost According to available statistics (4th Census ofMSME Sector), the sector employs an estimated 59.7 million people in 26.1 millionenterprises; labor intensity in the MSE sector is estimated to be nearly four times that

of large enterprises

In Vietnam, According to Government Decree No.90/2001/ND – CP 23/1/2007

of supporting the Vietnamese SMEs, we can define SMEs as “production facilities,independent businesses registered under current law, have a registered capital ofVND10 billion or annual average number of employees not exceeding 300.”

1.2.2 The role of SMEs in the economy

In each national economy and territory, SMEs play the role in different levels,but generally have a number of roles as follows:

Role in the economy: SMEs account for a large proportion, even overwhelming

in the total number of enterprises (In Vietnam, only at registered businesses, the rate

is over 95 %) Therefore, their contribution to total output and employment issignificant

Role in stabilizing the economy: in the majority of the economy, SMEs act assubcontractors for large enterprises The subcontract adjustment at times allowed theeconomy to get stability Therefore, SMEs help stabilizing the economy

Make the economy dynamic: SMEs are flexible, therefore it is easy for them interm of adjusting businesses

Create the important industries and auxiliary services: SMEs can be specialized

in producing a few components in order to be assembled into a finished product.Important role of the local economy: while large firms are often placed in theeconomic centers of the country, SMEs are presented throughout the local and playthe role of important contributors to revenue, output and create local jobs

According to the Vietnam Chamber of Commerce and Industry (VCCI), up until31-12-2011, Vietnam has 543,963 enterprises (companies), with a capital of about 6million billion Of the total number of enterprises, nearly 97% are small andmedium-sized, mainly private businesses SMEs (SMEs) use 51% of the workforceand contribute more than 40% of the national GDP If we count other 133,000cooperatives, farms and about 3 million individual business, then SMEs contribute to60% of GDP Not only contribute significantly to the economic development of thecountry, SMEs create more than a million new jobs per year for the most untrainedlabor, contributing to poverty reduction, enhanced security society

1.2.3 Major types and sources of SMEs’ capital funds.

Major means of financing small and medium-sized businesses are:

- internal funds;

- overdrafts and bank loans;

- leasing and hire purchase arrangements;

- stock market equity and corporate bond issues;

- venture capital or private equity;

- asset-based finance such as factoring and invoice discounting; and

are typically used for asset purchasing and other business development andinvestment purposes over time However, overlaps between the two main forms ofbusiness debt finance are common For example, overdraft-type finance is often useddirectly or indirectly for capital investment purposes – while term loan finance isoften used to cover additional working capital requirements arising out of higher-volume production and sales.

As an alternative to buying capital equipment outright, SMEs sector might beacquired through leasing or hire purchase The attractions of this method ofinvestment financing to businesses include not only the avoidance of heavyimmediate drains on business financial resources/costly borrowing commitments butalso opportunities to obtain the latest capital equipment on a flexible short-term basiswhen required and guaranteed professional maintenance cover A significantfinancing variant here is for businesses to sell and then buy- or lease-back assets thatthey already own

However, outside equity capital is by far the most important alternative orsubstitute for conventional medium-to-long-term business debt finance Equity isespecially used to finance larger, longer-term, and higher-risk/higher-reward projectsand investments It is also often used by firms to whom debt finance is not availablebecause (e.g.) they are already very highly geared – and may be resorted to moregenerally by businesses when base interest rates are high and debt capital is availableonly on relatively unfavorable terms and conditions

The stock exchange is the biggest source of external equity capital wherelarge and established companies are concerned By contrast, smaller and newerenterprises tend to rely on venture capitalists and/or secondary or unlisted marketsources for equity funding

Historically, a major alternative to both long-term bank borrowing and shareissues has been the sale of interest-paying corporate bonds Nowadays, there issubstantial product diversity in the corporate bonds market Some corporate bonds(e.g those issued by newer and smaller companies and for leveraged take-overpurposes generally) have risk-and-reward characteristics little different from those of

shares Conversely, the bonds issued by large established blue-chip corporations may

be closely akin to government gilts

Finally, asset-based financing in the form of factoring and invoice discountingbecame major and growing means of raising finance against the trade debts ofcompanies Major attractions of factoring have tended to be the flexibility andbenefits to cash flows and the speed with which individual factors are able to convertmost of the face value of invoices into cash In addition, factors may provide usefuland staff-saving associated services – such as debt collection, general creditmanagement/protection, and sales ledger administration

Ordinary trade debts or delays in payment for purchases of goods and servicesare effectively a kind of informal borrowing or extension of credit to customers bythe sellers There is substantial similarity and substitutability between trade credit,factoring and invoice discounting, and overdrafts as instruments of businessfinancing All are used mainly to provide short-term flexible working capital But inpractice, all may develop into means of directly or indirectly financing long-termfixed capital investment and business growth

1.3 Credit activities of commercial banks to SMEs

1.3.1 The essentials of commercial banks’ credit to SMEs

Bank is one of the most important credit institutions of the economy Itprovides the most diverse financial services, especially credit, savings and paymentservices Commercial banks have more financial functions than any businessorganization active in the economy Activities of banks are currency tradingactivities and banking services: to take deposits from customers and use this money

to provide credit and provide payment services for the economy

Credit is one of commercial banks’ services, occupied a very important position

in the operation of commercial banks The main activities of a commercial bank are:

to raise capital and to make profit from the fund raised The use of capital is theprocess of creating various assets of the bank in which the loan is the largest amount

of assets and also, the most important one

Loans (or credits) benefit both businesses and banks This is not the relationshipbetween allocation, in which the principle of the borrower is to repay the principaland interest to the bank after a certain period of time stated in the loan agreement.Before becoming lenders, banks themselves borrow money from other organizationsand individuals in society Business make loan from bank in order to have thefinancial resources to implement investment projects and business for their profittarget Banks raise capital and lend them to get the interest-rate-difference profit toexist and operate Raising capital without loans, banks will not survive.

Bank lending situation has a close reciprocal relationship with the economicdevelopment of the country Obviously, loan is the leading economic functions ofbanks - financing business activities of enterprises, contributing to the growth of thebusinesses; ensuring the operation of the economy in order for it to exist anddevelop

1.3.2 Types of loans for SMEs in commercial banks

Secured loan

or property) as collateral for the loan, which then becomes a secured debt owed tothe creditor who gives the loan The debt is thus secured against the collateral — inthe event that the borrower defaults, the creditor takes possession of the asset used ascollateral and may sell it to regain some or all of the amount originally lent to theborrower, for example, foreclosure of a home From the creditor's perspective this is

a category of debt in which a lender has been granted a portion of the bundle ofrights to specified property If the sale of the collateral does not raise enough money

to pay off the debt, the creditor can often obtain a deficiency judgment against theborrower for the remaining amount

real estate Under this arrangement, the money is used to purchase the property.Commercial banks, however, are given security - a lien on the title to the house -until the mortgage is paid off in full If the borrower defaults on the loan, the bank

would have the legal right to repossess the house and sell it, to recover sums owing

to it

In the past, commercial banks have not been greatly interested in real estateloans and have placed only a relatively small percentage of assets in mortgages Astheir name implies, such financial institutions secured their earning primarily fromcommercial and consumer loans and left the major task of home financing to others.However, due to changes in banking laws and policies, commercial banks areincreasingly active in home financing

Changes in banking laws now allow commercial banks to make homemortgage loans on a more liberal basis than ever before In acquiring mortgages onreal estate, these institutions follow two main practices First, some of the banksmaintain active and well-organized departments whose primary function is tocompete actively for real estate loans In areas lacking specialized real estatefinancial institutions, these banks become the source for residential and farmmortgage loans Second, the banks acquire mortgages by simply purchasing themfrom mortgage bankers or dealers

In addition, dealer service companies, which were originally used to obtain carloans for permanent lenders such as commercial banks, wanted to broaden theiractivity beyond their local area In recent years, however, such companies haveconcentrated on acquiring mobile home loans in volume for both commercial banksand savings and loan associations Service companies obtain these loans from retaildealers, usually on a nonrecourse basis Almost all bank/service companyagreements contain a credit insurance policy that protects the lender if the consumerdefaults

Unsecured loan

assets (i.e., no collateral is involved) There are small business unsecured loans such

as credit cards and credit lines to large corporate credit lines These may be availablefrom financial institutions under many different guises or marketing packages:

1.3.3 Roles of commercial banks’ activities to SMEs

- The bank's lending activities provide capital for SMEs:

Investment for expanding production is a required objective for thedevelopment of enterprises Through the bank's lending activities, it will be donevery quickly

Banks are financial intermediaries whose task is to take the capital fromtemporarily not-in-need-of-capital enterprise to another one where capital isdemanded to ensure production and business processes Banks finance forenterprises not only in short term but also in medium and long term, therebyensuring that the business not only can maintain operation but also can expandproduction, especially in the key industries of the country

- The bank's lending activity helps businesses organize production efficiently:

The most important thing in bank's lending activity is not allocated capital butthe principle of principal and interest repayment by the specified time That is thereason why, for a business, capital regain is not enough: using capital efficiently,saving, and increasing the rotation of the capital are also very important Banks onlycredit for enterprises whose businesses’ plans are effective Therefore, enterpriseshave to show the banks that their businesses are profitable

Moreover, the bank's lending activity of checking up carefully before, duringand after the loan also monitors the progress and goals of the business-funded inorder to achieve the highest profit Bank credit also contributed to forcing businesses

to do business in the right way through the periodic inspection of corporate financial

statements Because the process of making profit of banks is closely related to thebusiness process of the enterprises, in order to ensure the profits as well as thebusiness’s, banks are always willing to remove barriers for the enterprises in allowedrange, give advice to businesses so they operate more efficiently and improve thecompetitiveness of the enterprises.

In summary, we can conclude that the assets of commercial banks broughtmany benefits to enterprises in general and SMEs in particular It does not onlyprovide the enterprises the capital requirements for production and businessactivities, but also help businesses exist and develop, enhance competitiveness in themarket and make businesses more responsible The enterprises will use their funds in

an effective, economical way and also, for the right purposes

1.4 Extending credit to SMEs in commercial banks

1.4.1 Views on expanding credit to SMEs from commercial banks

Expansion of commercial bank lending to SMEs can be defined as an increase

in the volume of bank lending to SMEs, including a large increase in loan size forSMEs, as well as the number of customers who are SMEs

In addition, the expansion of lending to small and medium-sized enterprisesmust be based on the quality of lending operations such as the nature and structure ofthe loan, reducing overdue If these mentioned processes can be well operated, thenthe expanded lending activities will be sustainable

In summary, the expansion of lending to SMEs is an increase in the volume

on the basis of improving the quality of the loans

1.4.2 The necessary of extending credit to SMEs

1.4.2.1 From commercial banks’ perspectives

Credit is the mainly profitable business of banks, while SMEs account for thelargest number of business types in the economy They are highly potentialcustomers of the bank Especially in the context of the current internationaleconomic integration, commercial banks in Vietnam are also facing competition

from foreign banks The competition between domestic and foreign commercialbanks are currently becoming more aggressive, these giant foreign competitors suchforced domestic banks to maximize the search for customers Therefore, the group ofSMEs is the appropriate object for the commercial banks in Vietnam in order toexpand credit relations in the current period.

1.4.2.2 From SMEs’ perspectives

SMEs are vital for economic growth and development in both industrialisedand developing countries, by playing a key role in creating new jobs

Financing is necessary to help them set up and expand their operations,develop new products, and invest in new staff or production facilities Many smallbusinesses start out as an idea from one or two people, who invest their own moneyand probably turn to family and friends for financial help in return for a share in thebusiness But if they are successful, there comes a time for all developing SMEswhen they need new investment to expand or innovate further That is where theyoften run into problems, because they find it much harder than larger businesses toobtain financing from banks, capital markets or other suppliers of credit

This “financing gap” is all the more important in a fast-changing based economy because of the speed of innovation Innovative SMEs with highgrowth potential, many of them in high-technology sectors, have played a pivotalrole in raising productivity and maintaining competitiveness in recent years Butinnovative products and services, however great their potential, need investment toflourish If SMEs cannot find the financing they need, brilliant ideas may fall by thewayside and this represents a loss in potential growth for the economy The

knowledge-“bagless” vacuum cleaner and the “wind-up” radio or flashlight which need nobatteries are now common household items, but nearly failed to see the light of daybecause their inventors could not find financial backing to transform their ideas intoproduction

1.4.3 Factors that impact on the expansion of credit to SMEs

1.4.3.1 Number of SMEs which have loans at commercial banks

This is the most specific indicator reflecting the expansion of bank lending.This index is calculated by the total numbers of SMEs loan relationships with thebank for a period of time.

1.4.3.2 Outstanding loans of SMEs

This indicator reflects the amount of bank’s capital, which customers owed at

a particular time This index is usually expressed as the ending balance of business

on the balance sheet of the banks If the outstanding balance of the current periodincreases compared to the previous one or exceeded the plan, then the expansion inlending to small and medium-sized enterprises increases However, asserting banksexpansion in lending to small and medium-sized businesses considers not only theabove criteria but also other indicators

1.4.3.3 Proportion of outstanding loans to SMEs

Proportion of loans to small and medium enterprise loans to total bank loans (T1):

Indicators show the ratio of banks increased or decreased If this indicator ispositive then the lending activities of SMEs expand over the year before In addition,

if this ratio increases continuously, it can be concluded that the rate of expansion isincreasing However, the rate should be set in relation to comparison with the growth

of other economic sectors in order to clarify the general trend in banking activities

1.4.3.5 Overdue and overdue ratio of lending activities of SMEs

Overdue debt is the total debt (principal and interest) of the enterprise that has notbeen paid back or rescheduled at maturity The rate (T2) is calculated according to thefollowing formula:

This is the criteria for evaluating the quality of bank loans to small andmedium-sized enterprises

1.4.4 Indicators that impact on the ability to the expansion of credit to SMEs in commercial banks

b Funding policy

Funding policies have a major impact on the Bank's credit policy If the Bankcan mobilize a large amount of capital which has diversity in time, size, and creditlimits for customers can be expanded then businesses will have more chances toapproach the Bank's capital

c The human factor.

Quality of the products and services that bank provide depends much on thehuman factor If the Bank has a qualified, capable, well managed human resourcethen it can predict possible risks, the investment environment’s effectiveness andquickly capture the evolution of the market, which will help the customers get thehighest efficiency from their investments

d The bank's information system.

A quality information system will make the Bank become capable of analyzingall the happenings inside or outside itself completely, accurately and timely.Thereby, the Bank can conduct the analysis and process of the information to makethe right decision in selecting customers for loans and expanding the access to capitalfor businesses

1.4.4.2 Objective factors

1.4.4.2.1 SMEs

a The size of the enterprises.

The bigger in size, stronger financial capacity of the businesses, the moreability they have to meet the conditions for larger loans As a result, businesses willhave better conditions in accessing to bank loans and the bank's lending activities

The first obstacle in accessing bank loans of SMEs is the size of the business

b The feasibility of the project.

If SMEs want to borrow money from banks, they must establish investmentprojects, which are feasible and effective Moreover, the profits of the project must

be sufficient to offset the costs, interest and capital repayment banks, while can still

be a profitable business However, the ability of constructing projects feasibility ofSMEs are generally not well done, while the consulting services to support thebusiness are not developing

c Security property, mortgage

This is a very important factor to the loan of the SMEs Because financialcollateral and mortgages are the basis for determining the maximum loan tocustomers So, if the business has sufficient collateral, collateral security or property,mortgages then they will be have more chances in accessing bank loans

1.4.4.2.2 Other factors

a The economic environment

Business activities of the Bank in general and lending activities in particular arevery sensitive to any variation from the economic environment As the economygrows, enterprises will increase bank loans to invest and expand production Bankstend to expand their credit businesses to meet the credit needs of the enterprises.Conversely, when the economy is in the doldrums, business hampered, inflationoccur, the enterprises also tend to not expand production loans, the Bank's

investment environment becomes narrow In conclusion, the economic environmenthas a significant impact on the bank's ability to access capital of SMEs.

b The law environment

Commercial banks are strictly controlled by the state Credit is one of theriskiest activities of the Bank, so it is the most tightly controlled one Asynchronized, comprehensive system of legal documents is the required conditionfor banks to expand and improve access to capital for SMEs and to ensure profittargets, safety for the banks

c Politic environment

A stable political environment will increase the confidence of the people andcreate favorable conditions to attract foreign investment, thus promoting thedevelopment of SMEs as well as the expansion of banks’ lending activities Incontrast, the unstable political environment will undermine the confidence ofinvestors, thus makes the Bank loans become riskier and banks tend to narrow theloans

CHAPTER 2.SITUATION OF CREDIT EXPANSION FOR SMALL AND MEDIUM ENTERPRISES (SMEs) AT

TECHCOMBANK - TRUNG YEN BRANCH

2.1 Introduction to Techcombank – Trung Yen branch

2 To provide employees with a great working environment where they havemultiple opportunities to develop, contribute and build a successful career

3 To offer shareholders superior long term returns by executing a fast growthstrategy while enforcing rigorous corporate governance and risk management bestpractices

3 Team work Techcombank can achieve goals by trusting colleagues andcollaborating to deliver the best to the bank

4 People development Techcombank develops people to achieve their bestpotential and rewards the best performers

5 Accountability When Techcombank commites to do something,Techcombank will do whatever it takes to get things done

2.1.1.2 About Techcombank Trung Yen

- Full name: Vietnam Technological and Commercial Joint stock Bank –Trung Yen branch

- Address: Number 12, 1B – Trung Yen, Trung Hoa, Cau Giay, Hanoi

Achievements :

- Capital mobilization

In order to attract customers, Techcombank - Trung Yen branch continuouslyoffer products that help to mobilize capital at attractive interest rates, abundantcategory, provide safe deposit services and profitable The branch had completedmobilization goal thanks to early spring campaign and was awarded 1 billion Totaldeposits reached 720 billion

- Business service

Number of new ATM cards released in 2012 reached 10,000, an increase of 150%compared to those in 2011

- Unsecured loan services

Techcombank Trung Yen branch associated with big companies such as Tran Anh,SONY, and many motorcycle shops in Hanoi in order to increase consumer lendingservices mortgage By the end of 2012, consumer loans increased by 109%compared to 2011

- Real estate loan services

Although in 2012 there were many changes in the economy, the real estate marketwas freezed but outstanding loan for mortgage still achieved the target of 100 billionVND

2.1.2 Business operation of Techcombank from 2010 to 2012

2.1.2.1 Techcombank’s overall performance

The testing economic climate of 2012 was a challenging year for bankingindustry in Vietnam Driven by the headwinds of past year, Techcombank shifted itsfocus from asset growth to strengthening its foundation in risk management, balancesheet, credit quality, and Corporate Governance This proved to be an effectiveadjustment that helped the Bank to maintain its steadfast moves to sustainablegrowth and market leadership

Key performance highlights were:

• Total assets decreased by 0.33%, down to VND 179,934 billion

• Total deposits (only customer Deposit, excluding other Credit institutions) grew by26%, reaching VND 111,462 billion

• Capital Adequacy Ratio (CAR) increased by 1.2% to 12.6%

As a result of Net Interest Margin (NIM) compression from 3.8% to 3.4% anddecrease of net fee income, operating income decreased by VND 901 billion, or14%, to VND 5,761 billion

Meanwhile, operating expenses increased 57% to VND 3,294 billion Thatreflects the continued investment in infrastructure, quality recruitment and Southbusiness development

In the face of the stuttering economy the management adopted prudent riskmanagement policies and more conservative approach in assessing NPLs As aresult, provision expenses increased to VND 1,450 billion

Techcombank also continued to adopt a conservative approach to balancesheet management, with a continued emphasis on liquidity and capital management.The capital adequacy ratio (CAR) increased from 11.4% to a robust 12.6% as at theend of 2012 while the loan-to-deposit ratio was maintained at 57.5%, a decreasefrom 65.9% in the previous year

The bank’s timely and strategic adjustments minimized the possibledownsize, and once again, proved that the bank is well prepared to stay strong in themost volatile times, and capable to continue its growth in a sustainable manner

Figure 2.1: Income Structure of Techcombank in 2010 – 2012

Source: Annual report 2010, 2011, 2012 – Techcombank

Total bank operating income was VND 5,761 billion, a 13.5% decrease fromlast year It shows a great effort by the Bank to minimize loss in the economicdownturn.

Due to slight compression of NIM’s from 3.8% to 3.4%, net interest incomedecreased marginally by 3.5% to VND 5,116 billion At the same time, net feeincome decreased by 51%, equivalent to VND 565 billion

The stagnant property market and low economic activities resulted in adecline in trade income by VND 289 billion In addition, the subdued capital market

in 2012 caused the underwriting fees on bond issuance to drop by VND 207 billion

Due to continued volatility in the markets the Bank incurred a trading loss onforeign exchange, gold, and securities of VND 136 billion It was, however, asubstantial improvement of VND 618 billion compared to 2011

Operating expenses increased by VND 1,195 billion, or 57%, from last year.This was mainly due to cost increases by 17% (VND 207 billion) in humanresources, 155% (VND 357 billion) in office rental and asset rental, 56% (VND 211billion) in office rental and asset maintenance, and 50% (VND 268 billion) in otherexpenses The higher operating costs represent the bank’s committed investment inits human resources by recruiting quality staff from both local and internationalmarkets, and especially in risk management, credit approval, compliance, andbusiness development in the South Additionally, the Bank continued to invest in ITinfrastructure and branch offices This year, Techcombank moved to new head officebuilding in Hanoi - The Techcombank Tower

Together with selective incremental investment in our foundation, the bankalso implemented a number of initiatives to boost cost-efficiency, one of which wasstaff and branch network optimization

Loan loss provision was reported to rise by 324% to VND 1,450 billion due to

an overall declining economy, the adoption of a conservative approach in assessingNPLs and other balance sheet strengthening initiatives Profit before tax reachedVND 1,018 billion, a decrease of 76% of last year Consequently, earnings per share

shrank 76% from VND 2,902 to 700 per share Return on Assets (ROA) ratio fellfrom 1.83% to 0.42%, and Return on Equity (ROE) ratio from 28.87% to 5.58%.

2.1.2.2 Key activities’ performance

 Capital mobilization

In the year 2012, Techcombank together with the whole banking system had toface with many challenges, one of which was the wild fluctuation of interest rate andthe high pressure to maintain operation performance in the context of legalregulation pushing more requirements on commercial banks In such an unstablebusiness environment, Techcombank has tried it best effort to overcome difficulties,giving the right direction for the interest rate operating mechanism and achieve goodperformance in fund mobilization activity

Figure 2.2: Capital mobilizing situation of Techcombank in 2010 – 2012

Source: Annual report 2010, 2011, 2012 – Techcombank

The table shows an upward trend of the growth in mobilized capital from 2010

to 2012 of Techcombank After the financial crisis in 2008 and under the pressure ofmany other financial institutions’ market competition, the total capital mobilized ofVPBANK in 2010 from the economy reached VND 108,334 billion, The totalmobilized capital by end of 2011 was VND 136,781 billion, increasing by 26% as

compared to the last year which was equivalent to VND 28,447 billion In wake offierce competition among credit institutions in fund mobilization, with the mainorientation of focusing on fund mobilization activity, Techcombank had set fundmobilization as the key target of the year 2012 from the start of the year Toimplement this task, the Board of Director drastically assigned fund mobilizationproducts with reasonable mobilized interest rates, in conjunction with promotionprograms, proper investment in technology, enhancing competitiveness in fundmobilization As a result, in the last months of 2012, total fund mobilization activityreached VND 150,633 billion, which was a significant increase by 10.1% from thefinal result in 2011.

Deposit from customers witnessed an impressive growth in both scale andproportion in liabilities Deposit from customers at 31/12/2012 increased 35% ascompared to 2011, mainly from growth in VND deposits

Figure 2.3: The deposit mobilization structure over the years

Source: Annual Report 2010, 2011, 2012 – Techcombank

The deposits structure until 31/12/2012 as follow:

- According to type of currency:

 Domestic currency deposits: reached VND 77,015 billion, accounting for84.3% of total deposits, decreased by 19% compared to 31/12/2011

 Foreign currency deposits: reached VND 16,238 billion, accounting for15.7% of total deposits, increased by 19% compared to 31/12/2011.

- According to maturity of deposits:

 Term deposits: reached VND 74,820 billion, 81.9% of total deposits

 Non-term deposits: reached VND 16,552 billion, 18.1% of total deposits

In 2012, Techcombank launched a number of fund mobilization activitiesincluding mobilizing certificate of deposits; bonds… issued Techcombank in order

to increase the proportion of medium and long term funds to serve the demand formanufacturing and business of enterprises

 Credit activity

Techcombank’s lending always plays an important role in funding theeconomy, contributing to the development of many regions and locationsnationwide Techcombank always exerted itself to achieve the best result in creditactivities In order to expand the customer network and speed up credit activities,Techcombank’s staffs has taken the initiative in finding potential customers, projectsand feasible business plans and creating good conditions to meet the fund’s demand

of customers (individuals, representatives of households, representatives ofcooperatives) with simple and convenient lending procedures, competitive andattractive lending interest rate However, the Circular 13/2010/TT-NHNNimplemented from October, 2010 and the rapid increase in the needs for borrowing

of enterprises and investment projects made it a big challenge for the bank to allocatecredit balance based on total outstanding loans and maintain the regular relation withcustomers to Techcombank

In recent years, even in fierce competition environment, the bank still managed

to expand its credit activity firmly and effectively, and has made a remarkableincrease in credit activities

Figure 2.4: The loans allocation by industry segment of Techcombank

2.2 Current situation of credit activities to SMEs at Techcombank - Trung Yen

2.2.1 The general provisions on lending to SMEs

-Transfer money to customer’s account

Monitoring:

-Accountants -Credit officers -Inspectors

Credit monito ring

Breach of contract

Principal and interest collecting

Enough and timely

End of contract

Not enough/not timely

Measures: Warning, enhance control, stop disbursement, credit review…

Not enough/not timely

Liquidate the

contract

Go to court

Step 1.Establishing the documents for the loan.

This is the first basic step in the loan process, it is done immediately after theloan officer contact with the customers who have demand for loans Establishingcredit history is important because it is the step of collecting information that willserve as a basis for the implementation of the next step, especially analysis andlending decisions

A credit profile needs to collect from customers the following information:

 Information on customer’s legal capacity and customer behavior

 Information about capital usability and customer repayment

 Information on credit guarantee

In order to collect basic information, banks often require customers to prepareand submit these following documents:

 Request for loan

 Proof of legal status of the customer, such as a license to establish or appointdirectors, charter operations

 The business plan and repayment plan, or investment projects

 Reporting the latest financial period

 The papers related to mortgage, pledge or loan guarantee

 Other relevant documents, if necessary

Step 2 Credit analysis.

Credit analysis is the analysis of current capabilities and potential ofcustomers about their use of the loan, repayment capacity and the ability to recoverthe loan principal and interest The objective of credit analysis is to find situationsthat may lead to risks for banks, anticipating the ability to control those risks andscheduled preventive measures to limit the damage which may occur out On theother hand, credit analysis can also check the authenticity of the loan application thatcustomers provided, from which the bank can review the payment behavior ofcustomers as a basis for lending decisions Analysis of the credit usually include:

customer's property assessment, evaluation of debt, cash flow analysis, and analysis

of other rates

Step 3 Decisions making

Credit contract is a written document, which recorded agreement between therecipient (client) and banks: the bank is committed to provide customers with a loan(or a credit) over a period of time and with a certain interest rate Credit contract iswritten according to the law in order to determine the rights and obligations of bothparties in relation to credit, and it must comply with the terms of the Act andRegulations Therefore, the credit agreement will include conditions with specificpurpose of the loan, the amount of credit, interest rates, fees, duration of credit,guarantee, disbursement and payment conditions, along with other conditions

Step 4 Disbursement

Disbursement is the next step after the credit contract is signed The bankgrants money to customers on the basis of credit commitments in the contract.Disbursement is also an important step because it can help detect and correctpromptly if there are mistakes in the previous step

Step 5 Supervision of credit

In addition to the granting of credit, bank also have to supervise customers:whether their loan is used on the right purpose, schedule or not; whether the businessprocesses have any adverse changes, signs of fraud or loss or not This step allowsbanks to collect additional information about customers If the information reflectsgood business, then credit quality is guaranteed In contrast, when the quality ofloans is threatened, the banks need to have solution as soon as possible

Step 6 Liquidation of the credit contract

This is the last stage of the lending process This stage includes: collection ofboth principal and interest, a review of the credit agreement, the liquidation of thecredit contract

Bank will collect customer debt in accordance with the terms have beencommitted in the credit contract Depending on the nature of the loan and thecustomer's financial situation, the two parties can reach agreement and choose one of