Download chapter 1 overview of the research thesis

Cohort 2013 – 2015
Master’s Thesis
Student: Do My Hanh
Improving the credit quality of Small and medium Enterprises
segment at Military Bank
Author: Bui Thi Thanh Van
Supervisor: Assoc. Prof. Dr. Nguyen Dinh Tho
Hanoi, June 2015
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ACKNOWLEDGMENTS
I would like to express my gratitude towards Management of the International
Department, Management of Nantes University, supervising professors and all professors who
directly teach, guide and share knowledge to me during the program, especially, I would like
to thank Associate Professor – Doctor Nguyen Dinh Tho for his earnest guidance during my
research, elaboration and finalization of this thesis.
I would like to send my thankfulness to my classmates and my colleagues at Military
Bank and valued customers who enthusiastically provide me with valuable information and
materials during my research and thesis writing process
I also would like to express deep gratitude towards my family, relatives and friends for
creating favorable condition for me to carry out my study and research.
Many thanks!
Author
Bui Thi Thanh Van
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Table of contents
Number
ABBREVIATIONS
LIST OF INFORMATION TABLES AND GRAPHS
EXECUTIVE SUMMARY ...................................................................................................... 7
CHAPTER 1 OVERVIEW OF THE RESEARCH THESIS................................................ 8
1.1
Reason for choosing the thesis ...................................................................................... 8
1.2
Overview of theoretical and practical study ............................................................... 9
1.3
Research objective and questions .............................................................................. 11
1.4
Research scale and methods ....................................................................................... 11
1.5
Contribution of the research topic ............................................................................. 12
1.6
Research structure ...................................................................................................... 12
CHAPTER 2 VIETNAM MACROECONOMIC CONTEXT AND BANKING
INDUSTRY OUTLOOK ........................................................................................................ 13
2.1
Macroeconomic environment ..................................................................................... 13
2.1.1 Political environment .................................................................................................... 13
2.1.2 Economic inviroment .................................................................................................... 14
2.1.3 Socialcultural environment ............................................................................................. 18
2.1.4 Technological effect on banking industry ...................................................................... 20
2.2
The financial environment of the banking industry................................................. 22
2.2.1 Power of supplier .......................................................................................................... 23
2.2.2 Threat of New Entrants ................................................................................................. 24
2.2.3 Industry Rivalry ............................................................................................................ 25
2.2.4 Power of Buyers ............................................................................................................ 26
2.2.5 Threat of Substitutes ..................................................................................................... 26
CHAPTER 3 INTRODUCTION ABOUT MILITARY BANK ......................................... 28
3.1
MB introduction .......................................................................................................... 28
3.2
Business performance ................................................................................................. 29
3.3
Lending ......................................................................................................................... 32
3.4
Other activities ............................................................................................................. 34
CHAPTER 4 ANALYSIS OF SMEs CREDIT QUALITY AT MILITARY BANK ........ 36
4.1
Real situation of SMEs credit quality at MB ............................................................ 36
4.1.1 Regulations of SMEs credit granting and credit rating at MB ...................................... 36
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Table of contents
Number
4.1.2 Analysis of lending activities and quality of SMEs outstanding loan at MB ............... 37
4.2
Evaluation of MB SMEs credit activities and credit quality management ............ 50
4.2.1 Issues of lending policy and operation orientation ....................................................... 50
4.2.2 Person’s issues .............................................................................................................. 51
4.2.3 Issues of procedures ...................................................................................................... 51
4.3
Causes ........................................................................................................................... 52
4.3.1 On MB’ side .................................................................................................................. 52
4.3.2 On SMEs side................................................................................................................ 53
4.3.3 Other causes .................................................................................................................. 54
CHAPTER 5 SOLUTIONS AND RECOMMENDATIONS TO IMPROVE CREDIT
QUALITY AT MILITARY BANK ....................................................................................... 56
5.1
Solutions to improve credit quality among SMEs at Military Bank ...................... 56
5.1.1 Suitable credit policies .................................................................................................. 56
5.1.2 Diversify credit activity to SMEs.................................................................................. 56
5.1.3 Human resource ............................................................................................................ 58
5.1.4 Procedure ...................................................................................................................... 59
5.1.5 IT developement ........................................................................................................... 61
5.2
Suggestions and conclusions ....................................................................................... 61
5.2.1 Suggestions .................................................................................................................... 61
5.2.2 Conclusion ..................................................................................................................... 61
REFERENCES LIST ............................................................................................................. 64
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ABBREVIATIONS
MB
Military Commercial Joint Stock Bank
SMEs
Small and medium Enterprises
SBV
State bank of Vietnam
NPLs
Non performing loans
ROA
Return on assets
ROE
Return on equity
VND
Vietnam dong
GDP
Gross domestic product
WTO
World trade organizaion
HSBC
Hongkong and Shanghai Banking Corporation
ANZ
Australia and New Zealand Banking
ACB
Asia Commercial Bank
VCB
Bank for Foreign Trade of Vietnam
Agribank
Vietnam Bank of Agriculture and Rural Development
BIDV
Bank for Investment and Development of Vietnam
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LIST OF INFORMATION TABLES, GRAPHS
Table 1.2: Definition of SMEs
Table 3.1: NPLs (group 3 -5) of five’s bank same size with MB
Table 3.2: Owner’s equity and total assets of MB
Table 3.3: Business Performance of MB
Table 3.4: NPLs
Table 4.1: SMEs classification criteria comparison
Table 4.2: Score classification of credit ratings
Table 4.3: The number of SMEs in credit relation with MB
Table 4.4: The number of SMEs meeting requirements of credit rating
Table 4.5: SMEs’ overdue loan proportion
Table 4.6: Indicators of SMEs lending in comparison with MB lending
Table 4.7: Structure of SMEs overdue loans by terms
Table 4.8: Structure of SMEs overdue loans by collaterals
Table 4.9: Proportion of non-performing loans by regions
Table 4.10: SMEs credit turnover
Table 4.11: Different stages of MB credit granting procedure
Graph 2.1: Vietnam’s GDP growth from 2004-2014
Garph 3.1: Owner’s equity and total assets of MB
Graph 4.1: Proportion of SMEs overdue loans
Graph 4.2: Proportion’s NPLs of SMEs
Graph 4.3: SMEs non-performing loans by currencies (VND and Foreign currencies)
Graph 4.4: Outstanding loan distribution by regions
Graph 4.5: Non-performing loan distribution by regions
Graph 4.6: Structure of SMEs non-performing loans by sectors
Figure 2.1: PEST’s Model
Figure 2.1: Porter’s five forces
Figure 2.2: Vietnam banking Porter’s five forces
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Figure 3.1: Organizational Structure of MB 2011 – 2015
Figure 3.2: Income before tax
Figure 3.3: Performance of loans
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EXECUTIVE SUMMARY
This thesis studies on the credit quality of SMEs segment at Military Bank. Up to now,
there have been a lot of reseach and studies on credit quality from different view points such
as bank’s view point, enterprise’ view point, or even economy’ view point. However, there has
not yet been any research focussing on evaluating and proposing solutions to the credit quality
of SMEs from the point of view of commercial bank. That is the reason why the the research
topic of improving the credit quality of Small and medium Enterprises segment at Military
Bank is selected for this thesis.
The research shows the macro-environment context with significant change affecting
SMEs credit granting activities. Competition in banking sector becomes increasingly serious,
meanwhile there are several drawbacks of credit granting for SMEs and credit quality among
SMEs at MB was affected by following main factors: (1) Credit granted for SMEs has
incurred higher level of risks than other customer categories, (2) Credit extension to SMEs
focuses on just a small number of enterprises with large amount of loan, thus when this
clientele faces difficulty, credit quality of SMEs’ loans fluctuated wildly, (3) There are still
bottlenecks in credit extension procedures at MB. Based on these conclusions, the author gives
out following solutions and recommendations to improve credit quality of this clientele and to
sustainably and effectively boost credit activity : (1) Suitable credit policies, (2) Diversify
credit activity to SMEs, (3) Human resource: training and capacity building for staffs, (4)
Procedure, (5) IT development for credit activity
Key words: SMEs, Credit quality, Credit.
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CHAPTER 1
OVERVIEW OF THE RESEARCH THESIS
1.1
Reason for choosing the thesis
In recent years, the number of Small and medium Enterprises (SMEs) continues to
grow and assert its position in the national economy. Every year, SMEs contribute about 40%
of GDP and accounts for 98% share of the number of firms in Vietnam. This area is
considered to have high potential economic development
Foreseeing this trend, the commercial banks focus to provide products and services to
meet the evolving needs of these clients. The main activities of commercial bank that provides
credit to this customer group, who is bring the main source of income, but it is also the most
risky activities of commercial banking in Vietnam.
After the global economic crisis erupted in 2008, the economic situation in Vietnam
began the first difficult as enterprises engaged in export to major markets such as the USA,
China, Europe, Japan. In the next years 2011 - 2013 the real estate bubble burst in Vietnam
has made continued economic more difficulty. All events have made a great influence on the
operation of banking system; bad debt problems become the most importance problem for all
banks in Vietnam. Standing in front of this situation, the commercial banks of Vietnam must
focus on strengthening credit risk management, while improving quality credit
So that a factor in Vietnam's banking network, in the recent years, Military
Commercial Joint Stock Bank has been focused on credit operations for SME customers and
step by step to improve their business operations to meet the requirements of economic
development and manage their credit risk.
Above factors put impacts on commercial bank operation, especially credit granting
activity. Since 2012, beside maintaining credit granting to SMEs, banks have paid more
attention to credit quality of this segment. To the direct effects caused by market non-stop
fluctuation on customers and banks itself operations, the author selected the topic of
“Improving the credit quality of Small and medium Enterprises segment at Military Bank”
aiming at analyzing the actual situation of lending activitiy and credit quality, then finding out
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causes as well as solutions to improve credit quality, contributing to business operation of the
author’s workplace
1.2
Overview of theoretical and practical study
Commercial bank is currency trading organization that operates primarily and regularly
taking deposits with charge repay and use that money to lend, and of the discount as an
intermediary for the payment of the economy. In particular, lending is one of the basic
activities of the bank, according to which credit institutions delivered to customers in an
amount to be used for the purpose and time limit specified in the agreement with the principle
of reimbursement principal and interest. Lending activity in general and lending for businesses
in particular carry a number of characteristics such as trust property the borrower will repay
principal and interest on term loan used for the right purposes, as reimbursement for funds, is
just the financial intermediation between depositors and borrowers so that after a certain time
the borrower must repay the loan, the credit period is determined on a risk and operational
cycle production customer business, particularly credit risk. Credit risk is not timely reimburse
customers for reasons of moral or economic environment, social difficulties. As one of the
activities of commercial banks, the lending for businesses is considered risky activities for
banks so that the banks in particular focus on credit risk management - credit quality
improvement to ensure active their activities. Improving credit quality is anticipated activities
to prevent and manage credit activities to increase the quality of clause quality thus promoting
lending activities and achieve the expected benefits of activity for bring bank loans. Improving
credit quality is often continuous operation of commercial banks to increase the quality of
loans, while commercial banks are constantly expanding the scale of lending.
In a market mechanism, to survive and obtain competitive advantage, adapt market and
increasing demand of customers, commercial banks must ensure that they are able to manage
risk factors towards lending. In addition, credit quality also puts a serious impact on borrowers
and the whole economy. Following are some details:
As for commercial banks: credit quality is expressed through their scale, extent, credit
limit which must match with their own competences and ensure their competitiveness in the
market with principle of ontime repayment and profit generating.
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As for customers: due to their fund demand of investing in their business operation,
credit quality is assessed according to the suitability towards using purpose and reasonable
interest and terms. Additionally, the procedures should be simple, friendly, attractive but still
ensure lending principle.
As for the whole economy: for the social-economic development, credit quality is
evaluated by the level of serving production and goods circulation, contributing to resolve
employment issues, exploiting economic potentials, boosting production accumulating and
concentrating, well dealing with relations between credit growth and economic growth,
integrating with international community.
To study the credit quality enhancement at commercial banks, there is a must to study
researches of Basel Committee on Banking supervision – BCBS, in which, Basel Committee
widely established and published supervising standards and guidelines that Basel I and Basel
II set in order to ensure that commercial banks operate in an increasingly transparent manner,
helping them with preventing and minimizing risks, then, able to manage credit risk. It can be
said that Basel agreement is an all-sided study of credit risk management like probability of
not repaying (PD), risky outstanding loan (EAD), and estimated loss in case of not repaying
(LGD) do individuals, enterprises and credit scoring system for financial institutions with
internally accessing approach.
Besides, Basel Committee also lists criteria to enhance the effectiveness of credit
quality improving activities on the basis of managing credit limit, collateral, policy of nonperforming loan collection and management, amending credit granting and approving
procedure based on risk measurements; and appraising credit based on risk factors, supporting
the supervision and controlling of credit quality by using criteria, early warning signals in case
there is a reduction of credit quality.
In Vietnam, there are a lot of research of how to improve credit quality at Vietnam’s
commercial banks by various authors. One example is the study of “JSC Bank for Foreign
Trade of Vietnam credit quality improvement in the phase of integration” by Nguyen Thi Thu
Dong (2012) which shows that there were some drawbacks of Vietcombank’s credit rating
system affecting the quality of customer evaluation and its first granting credit was not
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accurate, resulting in low secure level of this loan’s quality. Another example is “Solutions to
improve short-term credit quality at Ha Noi Agriculture and Rural development Bank” by Ngo
Van Minh (2010) which contains information of unsound issues of healthy credit growth at
Agribank Ha Noi and enhancing debt handling at this bank. As a matter of fact, there have
been various studies of credit quality at some banks like Agribank, Vietcombank, and so on
during the period before 2012 and between 2013 and 2015. Up to now, there is no author
making report of granting credit and credit quality for SMEs at Military Bank. That is the
reason why this thesis is to study and analyze credit quality from the viewpoint of commercial
bank, specifically Military Bank with focus on appropriate evaluation of current credit quality
of Military Bank as well as determining exactly reasons of quality drawbacks which enables
Military Bank to find out suitable solutions of management which is a key for the bank to
survive in the market-oriented economy and filling the gap of this operation at one bank of the
top 5 banks in Vietnam.
1.3
Research objective and questions
The purpose of this study is to looking at the factors affecting the credit quality of the
small and medium enterprises segment in the Military Commercial Joint Stock Bank, which
find feasible solutions in the immediate to contribute to improve the quality of credit in the
Military Bank.
The thesis also aims to answer common questions:
(1) What is the credit quality for bank?
(2) How about credit quality of SMEs at Military Bank?
(3) What is the factor effect to credit quality for SMEs segment of the Military Bank?
(4) How do improve the credit quality of Military bank?
1.4
Research scale and methods
Subject and scope of research is based on data of small and medium enterprises in the
Military bank for period from 2012 to 2014. To achieve the research aims and answer the
research questions, the thesis uses:
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
Qualitative methods in order to understand the nature of the problem based on the
theoretical basis of credit and models credit management in banking (Models 6C, PEST, 5P of
Michel Poter).

Quantitative methods approach to measure and analyze the satisfaction of credit
quality for SMEs segment at Military bank.
1.5
Contribution of the research topic
Firstly, the research is relation with knowledge’s of some subjects such as “ Credit risk
management”, “Market risk management” , “ Product strategy and financial service” of this
course that student are studying.
Secondly, one of most advantage that students are guided by Faculty who have many
experience in the field.
Last, the research accordance with the experience and current position of student who
works for Small and medium enterprise product and services development department - Small
and medium enterprise division in the Military Bank. The unit which is building processes of
credit and provide new product to SMEs segment. Because of this advantages, student can
collected data for the research as well as. And the most importance that the information from
this research can be applied to improving the credit quality of Small and medium Enterprises
segment at Military Bank thought a student’s current job.
1.6
Research structure
In addition to listing the references and appendices, the content of the essay was
distributed into 5 chapters:
-
Chapter 1: Overview of the research thesis.
-
Chapter 2: Vietnam macroeconomic context and banking industry outlook .
-
Chapter 3: Introduction about Military Bank.
-
Chapter 4: Analysis of SMEs credit quality at Military Bank.
-
Chapter 5: Solutions and recommendations to improve credit quality at Military Bank.
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CHAPTER 2
VIETNAM MACROECONOMIC CONTEXT AND BANKING INDUSTRY
OUTLOOK
2.1 Macroeconomic environment
Banking systems has been affected a lot macroeconomic factors, throught the PEST’s
model (Dieter Reineke, 2010) to understand the affect of this factor:
Figure 2.1: PEST’s Model (Dieter Reineke, 2010)
2.1.1 Political environment
Vietnam is a country with stable political status regardless of some disputes of land and sea
territories with neighbouring countries, China. However, Vietnam Government has applied foreign
policy of peaceful negotiation. Stable political factor play an important role, a premise for
individuals, enterprises, or foreign investors to be assured when doing business in Vietnam,
contributing to Vientam’s economic growth. Vietnam political stability offers favorable conditions
to business activities. Vietnam Government has increasingly open and willing to meet society’s
reasonable requirements, then, bring beliefs and attract investments from overseas. Businesses and
organizations are guaranteed with secure investment, owning rights of other properties, this
attractiveness of Vientam business environment can be indicated from the fact that Foreign Direct
Investment (FDI) has reached USD 20 billion on average over the last few years regardless of the
world and regional economies’ numerous fluctuation.
Vietnam’s guideline is to boost foreign affairs and integration such as joining WTO in
2007, negotiating and signing bilateral agreements with regional countries and in the world like
Vietnam – Korea Free Trading Agreement in 2015, Vietnam – Custom union of Rusia13
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Belarus-Kazakhstan Free Trade Agreement, in addition to continuing negotiation on Vietnam
– EU Free Trading Agreement, Trans-Pacific Strategic Economic Partnership Agreement
(TPP), and joint ASEAN economic community, which enables to boost economic growth.
Besides, legal documents system has been increasingly amended so that they can support
associations and businesses regarding economic activities such as Business Law No. 60/2005QH11 issued in 2005. Added Tax Law No. 13/2008/QH12, Tax Management Law No.
78/2006/QH11. During executing time, the State has conducted supervising and adjustment so that
legal framework becomes more suitable for current economic situation.
According to Decree No. 10/NQ-CP on 24/04/2012 to enact economic development
strategy for 2011-2012, the social divisions of the country development orientation 2011-2-1,
of which Vietnam orientation Vietnam economic growth until 2020 is the restructuring of the
economy, improving the quality, efficiency, competitiveness and active international
integration. Create the platform to 2020 put our country basically become a modern industrial
country. Oriented social-economic development of Vietnam's Government, the economic
sectors with the SMEs scale also contribute to accelerating the process of economic
restructuring, especially in rural areas. If as large enterprises often concentrate in cities, urban
areas the SMEs in weave back across the region promoting agricultural production, economic
development, household, restore and develop the villages, creating the development
sustainable, evenly between the regions and capital accumulation for industrialization process
modernization. To become a powerful country in the world, the country at the same time must
also have a strong economy, SMEs are to hold an important role in the political economy of
Vietnam to help exploit maximum resources capital: In populations contain much potential but
unexploited properly such as : financial, intelligence, experience, labor ... The establishment of
SMEs do not require an initial capital amount, which is too large, therefore it creates
opportunities for many middle-class residents contributed capital, from which attract a
maximum idle capital into the business.
2.1.2 Economic inviroment
The economy in the period 2013-2015 takes place in the context of the slow recovery
of the world economy after the global downturn. The Eurozone was strongly influenced by the
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economic sanctions between the countries in the region due to the unsettled political situation
in some countries of the European region. Economic growth situation of South-East Asian
countries are falling. The highlight is the end of the year 2015, the oil price on the world
market reduced depth and still continues to decline, for the oil import countries such as
Vietnam, the oil price decrease helps promote consumption and private investment as well as
improve the balance of payments.
In the context of world political-economic volatility and instability, making great
impact on business operations in the country, Vietnam's economy has also been affected by
the political context of instability in the area when China put down unauthorized 981 HD rig
in the exclusive economic zone territory of Vietnam , plus the difficulties from previous years
that have not been resolved as pressure on absorptive capacity of the economy which is not
high; pressure on bad debt is still heavy; domestic consumption goods in slow; low
management capacity and competitiveness of enterprises... Before that context, the
Government, the Prime Minister issued several policy documents aimed at stabilizing macro,
difficulty and improved business environment, creating the momentum of growth, ensuring
social security work. Vietnam's economic growth over the years continued to maintain and
increase positive shows signs of the economy: according to figures from the General Statistics
Bureau, the gross domestic product (GDP) in 2014 was estimated at 5.98 percent, growth this
year is higher than the increase of 5.42% in 2013 and the 5.25% by 2012. Besides the structure
of Vietnam's economy continues to maintain a positive direction in the correct orientation for
the development of industry and services: the area of agricultural, forestry and aquatic
products representing 18.12%; the industrial and construction sector accounted for 38.50%;
the service sector accounted for 43.38% (corresponding structure of 2013 are: 18.38%;
38.31%; 43.31%).
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Graph 2.1: GDP by years
Unit: %
Source: General Bureau of statistics
2007 was the year that Vietnam became WTO member. Therefore, it brought plenty of
opportunities as well as the favorable conditions for the economy, indicators of economic
development plans are complete and surpass the plan, the 2008 world financial crisis broke out
in Vietnam's economy nor outside influences. In this period, the increasing in GDP was
always lower than 7% and increasingly come down, only 5.25% to 2012, by two-thirds
compared to the level before the crisis. Meanwhile, before the crisis, Vietnam has always been
considered one of the bright spots on the map of the global economy with average growth rate
reached 7.8%/year.
The low inflation rate is a great success of monetary policy in curbing inflation, macroeconomic stability. The period 2004-2013, four years of inflation under 7% is 2006, 2009,
2011 and 2013, which had the lowest level of 2014, is 1.84%. Left, the other five were kept to
very high levels and the peak is 19.89% in 2008. The maintenance of low inflation in the years
to come here accompanied by monetary policy in 2014-2015 focus maintained low interest
rates of 8%-10% for enterprises with continuous financing interest rates reduced investor
people tend to invest in economic and social activities, instead of sending the money the idle
in a bank. Besides some adjustments of the business tax as income tax circular 78/2014/TT-
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BTC decreased from 25%-22% effect on 01/01/2014 and dropped 20% in 2016 and created
conditions for enterprises to expand investment in production and business activities.
With the suitable inflation regime, maintain low monetary policy stable Government,
macro, difficulty and the improving business environment in the past period. That contribution
must also mention the role of SMEs, according to the Decree No. 56/2009/ND-CP dated
30/6/2009 of the Government on development assistance for small and medium enterprises,
the SMEs are divided according to the criteria according to which:
Small and medium enterprise is business establishments registered under the provisions
of the law business, are divided into three levels: micro, small, medium scale total liabilities
(total liabilities equal total assets identified in the balance sheet of your business) or the
average of the year (total liabilities is the priority criteria) in particular, table 1.2:
Table 1.2: Definition of SMEs
Scale
Area
I. Agriculture,
forestry
and
fisheries
II. Industry and
construction
III. Trade and
services
Micro
enterprise
Number of
labor
Under 10
people
Under 10
people
Under 10
people
Small enterprise
Total
capital
Under 20
billion
dong
Under 20
billion
dong
Under 10
billion
dong
Medium enterprise
Number
Total
Number of
of labor
capital
labor
From 10
From 20 to
From 200
to 200
100 billion
to 300
people
dong
people
From 10
From 20 to
From 200
to 200
100 billion
to 300
people
dong
people
From 10
From 10 to From 50 to
to 50
50 billion
100 people
people
dong
Source: Decree No. 56/2009/ND-CP
Based on the classification criteria, SMEs can be seen as a component, which has a
significant role in the growth and development of Vietnamese economy. According to
Vietnam's SME Association, the country had more than 500,000 enterprises, accounting for
more than 97.5% of the enterprises are operating. Every year, this volume contributes 50% of
the value of exports of the country, which are mainly consumer goods exports, and contributed
over 40% of GDP; attracting more than 51% of the number of employees. This business join
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operates on most of the areas of production and business, that the ability to supply products to
the market is huge and satisfying the needs of many different market segments.
Moreover, since the WTO, Vietnam has maintained a stable political environment and
built a legal corridor to attract foreign investment. Meanwhile, SMEs contain appropriate
conditions such as capital requirements are not too big, fast payback ability, cheap labor and
gradually became targets of foreign investors to focus towards.
Besides, Vietnam economy still shows many problems for SMEs such groups depends
on the individual components accounted for 32% of GDP over the long term from 2007 to
date, indicating economic growth even at small and fragmented. Low labor productivity, labor
Vietnam is only 1/18 of the Singapore labor productivity; 1/6 of Malaysia; 1/3 of Thailand and
China. SMEs have large numbers but they are very small-scale, labor mainly ordinary,
outdated technology, thin capital, market fragmentation; labor productivity and product quality
is low, leading to low competitiveness as well as low business efficiency. In addition,
computer links, joint cooperation, support the protection of enterprises is also very weak. Need
to have policies from the agencies held mass in the same building and social support from
legal, policy, training in order to improve the limited surface of the SMEs.
2.1.3 Socialcultural environment
According to the the report of General Statistics Office of Vietnam, the population of
Vietnam in 2011 is 86 million people, out of which the population of rare 30.6% urban, the
rural population accounted for 69.4%; male constitute 49.5%, 50.5% female. Vietnam's
population concentrated in the Red River Delta region has the largest population, followed by
North-Central and Central Coast is also home to Vietnam's abundant labor resources. Every
year, Vietnam's population increase of nearly 1 million people and also the looming 1 million
people joined the labor force, this is also the new labor resources complement the public sector
agriculture contributes significantly to economic activity but also created considerable
pressure to the Government on the issue of creating new jobs for workers.
Vietnam's population structure in the Group of "young population structure," the
number of people in the group from age 20 to 50 years were 46.6% of the population, the
number of people from 15-31 years old accounted for 26.2% of the population. The labor
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force in labor age: male from 15 to 60 years of age, females from 15 to 55 years old. Among
the population aged 15 and over, there are few studies have not graduated primary school and
illiteracy 17.27%, the number of the population are students from intermediate upwards only
12.95% of the population, this is a massive challenge elements of Vietnam in economic and
social development.
Rapid urbanization rate: lead to the concentration of population and the need to
facilitate the lives of people as well as the social conditions favorable for economic activity,
especially SMEs producing business opportunity serve social and economic life of the new
Urban.
Vietnam social economic environment has a huge influence in productive business
activities of the organization, especially the SMEs, the positive side, you can see that is where
SMES created jobs for many workers in every region as well as all components; because of
the characteristics of simple business, SMEs do not require the qualified skilled workers so
that they mainly use the popular labor (labor of limbs) and created a stable source of income,
regular workers, reduce the disparity between the income of the population , created the
development relatively evenly between the regions of the country and improve the relationship
between the different economic areas. According to the Vietnam Association of SMEs, the
current blocks in this business are using 50% of workers in the total number of enterprises.
Face restrictions on labor quality of SMEs is that management and labor resources, lowquality lead to limitations on the capacity of legal policy approach and international practices
in business. According to statistics, up to 55.63 percent of business owners have students from
intermediate level back down, out of which 43.3% of business owners have students from
primary and secondary levels. And up to 75% of the workforce in the SMEs are not yet trained
technical expertise notably most of the business owners, even those who are students from
colleges and universities and over, also few people trained on knowledge economy and
enterprise management, the business law class on ..., this had a major influence on the making
of strategy development, business and management orientation, avoid the legal risks of the
Vietnam business.
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Currently, Vietnam's economy is increasingly following integration into the national
economy while the core competence of SMEs human resources is still very limited in the
international integration process, besides the access restrictions stemming from many causes ,
both subjective and objective, impartial part due to our country's economy in the Cabinet as
the administrative reform took place still slow, lacking of macro-economic policies stability,
causing distrust for business..., however, is largely due to the subjectivity of the small and
medium enterprises have yet to really learn the policies and practices of international law to its
own capacity in business.
2.1.4 Technological effect on banking industry
According to the Central 8 lock 2 resolutions on Science and technology, confirms the
role of science and technology in development is a key component, according to the report of
the Finance Committee, the annual budget Vietnam spent about 2% of the total state budget
(but if calculated on only 0.5% of GDP) for the field of science and technology to promote the
research and application of scientific achievements in the social economy. Plus the cost of the
social and business outside the State for the field is still very low, about 0.3-0.4% of GDP, as a
result, the total investment of Vietnam for the annual science and technology to less than 1%
of GDP. Meanwhile, China's investment rate in 2010 is 2.2% of GDP, of South Korea's 4.5%
of GDP. Thus see that Vietnam resources for learning technologies limited drilling led to
weaknesses in many aspects of this field.
There are many researches in Vietnam but most of them are theories and predictions,
whereas the practical issues come into life then still missing. The research of decoding and
localization of foreign technology has been made but not much and not already contributing to
raising the level of technology businesses to Vietnam. The number of people who work in the
field of science and technology has increased rapidly in number but the quality was still low,
the unreasonable structure of industries and mainly concentrated in the universities,
Government Research Institute. In particular, the team of experts leading the field of science
and technology priorities such as: biotechnology, nanotechnology, circuit technology, the lack
of automation. Planning on development of human resources of high level not properly and
make longer discrete, yet effective with the help of the organizations, individuals, overseas
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21
Vietnamese scientists. The facilities serving scientific research have been promoting
investment but overall still missing and weak, do not meet the needs of development in the
field of high technology.
The level of technology enterprises mainly medium and low, slow the process leading
to the quality and competitiveness of the products on the domestic and foreign markets is not
yet high, Vietnam business have yet to focus on research and development (R & D), very little
spending for business R & D. In addition, human resources in Vietnam still exist many
restrictions by the education and training system, heavy on theory or was too outdated, does
not meet the requirements of the labor market is also the weak point for businesses to promote
research and development activities.
Science and technology is an important factor in promoting production and business
operations to increase productivity. But here is the general has been Vietnam and the SMEs
which are the level of science and technology innovation capacity is still low: machinery and
technology used in enterprises of Vietnam mainly imported and often the equipment is out of
depreciation. This is one of the major challenges in the operation of small and medium
enterprises affected by the two main causes are: the financial capacity of SMEs also limited
costs to the investment shops, modern machinery and equipment-advanced technology and
energy managers are still not enough experience so often buy machines which are outdated
technology. Technology plays an important role in the production process, creating quality
products at low cost, the technical science applications of a lot of SMEs are experiencing
challenges in terms of cost, the awareness and human resources. The number of enterprises
active in the field of science and technology is also very less.
Conclusion: The macro factors on as economic, political, social, technical lead to low
competitiveness of Vietnam and the Vietnam businesses on the market. Lack of capital,
obsolete technology led to low business efficiency, commodity products of Vietnam have low
domestic rates, depending on the source of raw material which imported accessories that affect
competitiveness. Merchandise products of the Vietnam business only serves the needs of a few
specific markets or respond to the needs of customers in the segment of "niche markets" or too
dependent on a certain field. Also a factor leading to poor competitiveness of Vietnam is not
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yet focusing on brand building activities, communication, promotion, product introduction,
therefore, the ability to dominate the market, market development of this enterprise is still and
required a long time to confirm themselves.
2.2 The financial environment of the banking industry
Vietnamese banking industry started to grow since 1990 after opening the economy
and shifting to a market economy, initially the Vietnam banking system is one-level, so far has
had the system of banks and non-bank institutions. Until the year 2015, Vietnam had 35
commercial banks, including the four State commercial banks, the rest are joint stock
commercial banks. In addition, Vietnam banking system also includes 6 venture banks, 66
foreign-owned banks and branches, offices of foreign banks, about 30 financial companies and
financial leasing, over 1,000 funds. Counted on a population of 87 million, Vietnam at an
average of each Bank are serving approximately 0.8 million. Besides, Vietnam has a legal
systems the law (fundamental law on credit institutions 2010) support the activities of the
Bank, and have a dedicated sister agency responsible for monitoring and regulating the
activity of banking system's SBV.
Along with the downward trend of the whole Vietnam's economy since the global
economic crisis of 2008, the banking industry is experiencing a difficult period with credit
growth consistently at a low level, the cause of this condition is mainly due to the shrinking of
the economy the bankruptcy of companies as well as low consumption levels due to concerns
about income is not stable in the near future. The banking industry is really in trouble when
the rate of these loans does not have liquidity of the banks always at a high level from 3% to
4%, the market demand to freeze and have to over 60% of businesses in the economy reported
negative net income levels. Sonic profits is partly due to the capital investment in the property
market and the falling property prices repeatedly has caused losses for investors and then to
the lender. Besides, the inevitable consequence of weakness in operations management at
some of Vietnam's Bank is a series of business acquisitions and mergers of banks with large
scale in the past time. In addition to the birth of Vietnam Asset Management Company
(VAMC) helps banks handle bad debt problems to focus back on business activities, more
cautious in credit management and preparation to face and handle the burden of bad debt in
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23
the future. With the impact of the SBV in the merger, and sell debt for VAMC, promises to
bring a healthy environment and be more strict rules in the management of the risks and take
advantage of the economic scale.
Within the scope of this thesis, the author analyzes the pattern in the pressure of
competition Michel Porter to see the main competitive forces in the financial market in
Vietnam
Figure 2.1: Porter’s five forces
(Source: Micheal E.Porter, 1980)
Threat of New Entrants
Bargaining
Power of
Suppliers
Industry Rivalry
Bargaining
Power of
Buyers
Threat of Substitutes
2.2.1 Power of supplier
The number of depositors increased not only quality and quantity, the perception of
depositors as well as high when not only the choice of the Bank has good deposits interest
rates that depositors also started to attach importance to the quality of the Bank's services, the
level of prestige and business operations of deposit options bank has money hidden risks
leading to loss of liquidity and no guarantee of depositors.
The reduced interest rate policy of the Bank in the past year constantly decreased from
7% to 5%, this leads to a lack of attractive investment channel deposits to depositors. The
source of idle money is turning to other investment channels with higher profit rates such as
investing in the stock market, or the difference in business rates.
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24
In time, a series of business mergers, large banks such as Dai A bank with HD bank,
Ficobank – Saigon commercial bank – Tin Nghia Bank, Maritimebank with Mekong bank,
Vietinbank with MHB led to the loss of trust of depositors with the bank on market
psychology, skepticism and a desire to use the safety which led to depositors shifting funds to
the poor form the liquidity like real estate, gold pieces ... led to the reduction of sources of
money to be put into economic activities.
2.2.2 Threat of New Entrants
Vietnam joined the WTO, so the ability to penetrate new foreign bank in Vietnam, or
the newly established Bank is also potential new rivals MB to consider.
According to WTO commitments in 2007 Vietnam allowing the establishment of foreignowned banks, the Bank is in a particular industry are highly competitive so free establishment
has pretty strict rules as well as the barrier for new competitors to enter the market place, room
for foreign investors also was limited to 30% foreign strategic shareholders, also just to be
holding up to 20% of the Charter capital.
The domestic group corporations large economic suggestions to establish the Bank, but
more likely hard to make because SBV fears the investment spread over to other areas of the
economy.
Banking activities subject to the light painting soup of non-bank financial institutions
as financial companies (financial companies in the Corporation, the Corporation for operating
credit, loan arrangements, mobilization of capital); stock company (with investment
underwriting, mergers, investment advice ...) However in the future if the model is successful,
it is going to be the direct competitors with the Bank on each array operations, especially the
competition of independent securities firms have large scale up investment banking activities.
So despite the barrier joining the banking market is quite rigorous but bank market still
attracting the interest of many large organizations in particular organizations with strong
financial, modern banking technology, international brand. So the competition of rival lawyers
will increasingly tough to survive and grow in this sector of the MB. The annexation of the
sale between the ongoing strong industries, the number of small to medium banks will drop
significantly and will reduce competition in the industry.
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25
2.2.3 Industry Rivalry
The number of direct competitors on the very large (currently consisting of 104 banks
including foreign and domestic, there are also financial companies, 18 and 12 leasing
companies, more than 1,000 people's credit fund facility and a microfinance organization).
Domestic banks constantly to lag compared to foreign banks financial strength as well
as technology. Foreign banks active in Vietnam such as HSBC, ANZ, Standard Charter bank,
60-70% of revenue comes from charging service activities, while that same bank's revenue is
from the income from interest. This may explain why the rate of bad debt is always lower than
the foreign bank to 3 times that of domestic banks. Domestic banks need to put a large
investment in terms of technology such as put into upgrading the electronic banking services,
cards, extension branch.
The market share of the Bank blocks the strong shift in recent years, from the
commercial banking business of stock (big 4 include: Argibank, Vietcombank, BIDV,
Vietinbank) into joint stock commercial bank group enterprise.
Banking activities subject to the light painting soup of non-bank financial institutions
as financial companies (financial companies in the Corporation, the Corporation for operating
credit, loan arrangements, mobilization of capital); stock company (with investment
underwriting, mergers, investment advice ...) However in the future if the model is successful,
it is going to be the direct competitors with the Bank on each array operations, especially the
competition of independent securities firms have large scale up investment banking activities.
Next to it is the competition of shark loan funds are also emerging as a rival hit the
interest of credit institution, according to figures of the Central Institute of economic
management, the shark loan in Vietnam in recent time amounts to 30% of the total
outstanding. Although the interest rate may be higher from 15%-20% per month but the
attractiveness of the shark loan market that is the simplicity, convenience of time and paper
procedures. Shark loan funds network stretches across territory weave from urban to rural
areas, to meet the needs of the economic sectors especially for individual clients and
enterprise.
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26
2.2.4 Power of Buyers
The customer plays a main role in the Bank's strategy analysis, due to the profitable
people is mainly for the Bank. However the customer is not really sensitive to the quality of
services they use, they will not be willing to pay a higher price for that service, whether the
service is considered to have better quality. Therefore, it is necessary to gain confidence for
clients.
The Bank has been the positive factors in linking the idle funds in the economy,
especially manufacturing business economics. Business lending products accounts for 66% of
total customer loans. According to the criteria of the Vietnam Chamber of Commerce and
industry (VCCI) 80% of SMES is Bank loans so the tram of sizable influence to business
lending activity by the credit institutions.
2.2.5 Threat of Substitutes
Products and services (mainly traditional products are deposits, loan, payment services)
in the banking industry are evaluated nearly no alternative product, product supply services of
commercial bank credit to bear the lightweight competition but not substantially of certain
products such as :
Trade credit between the buyer and the seller in the seller that allows payment for their
product instead of paying before or soon after delivery of the goods to the service, the majority
of SMEs is also the partner SMEs therefore fairly limited financial capability, to make use of
credit resources of commercial SMEs is very little or slow short payment time does not ensure
long-term stable capital as sources of credit from commercial banks promptly meet the needs
of production and business of SMEs.
Self financing for business activity service through issuing bonds, shares on the
financial markets, small scale SMEs financing through the issuance of bonds, stocks quite
limited focus only in enterprises the financial situation is stable, the scale has grown into big
business and preparing to leave SME customer segment.
Also need to refer to a number of emerging payment methods recently as the payment
service of the telecommunications company, the type of virtual money used to pay on the
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27
website, social networks will replace the traditional payment method especially transactions in
the personal banking segmen
Figure 2.2: Vietnam banking Porter’s five forces
Threat of New Entrants:


Power of
Suppliers:
Many banks &
similar products
Foreign bank
Other Financial institutions
Industry Rivalry:
 Product
 Interest
 Network
 Techonlogy
Threat of Substitutes: Capital market
27
Power of
Buyers: Many
banks & similar
products
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CHAPTER 3
INTRODUCTION ABOUT MILITARY BANK
3.1
MB introduction
Military Commercial Joint Stock Bank was established on 04.11.1994, with the initial
goal is to support military enterprises in doing business and exploitation of banking services
for all sectors of the market economy. MB’s headquarter is at 28 Dien Bien Phu with a charter
capital of 20 billion and 25 employees. From the position of small bank, MB laid the
foundation for sustainable development and stable bank then became only profitable bank in
the Asian financial crisis in 1997 - just three years after the establishment, maintenance
growth at 20% -30% in the next years.
With tireless efforts, MB has proven itself to be a conscientious and reliable friend of
customer for over 20 years. Starting in 2011, MB has marked a new stage, performing
successfully listed on the stock market, trading networks expanded into two branches in Laos
and Cambodia, became one of top five Joint Stock Banks in Vietnam, and continued to
maintain that position until now. At present, the charter capital of MB has increased to 11,000
billion dong, with a network of over 300 outlets across Vietnam, along with the expansion of
the operation scales, MB has always focused on the quality and diversification of products &
services to meet the requirements of all subjects in the economy.
Currently, MB is looking forward to operate under the model of MB Group's parent
company - Military Bank and its subsidiaries in the fields of securities, fund management,
insurance ... in order to maximize the advantages set Group operating effectively in their
business areas.
Current organizational model Military Commercial Joint Stock Bank as follows:
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29
Figure 3.1: Organizational Structure of MB 2011 – 2015
Source: Annual Report 2014
3.2
Business performance
In 2014, the economy has many signs of positive change, macroeconomic environment
is recovering and becoming stable, therefore financial markets also has the better sides.
Activities of domestic credit organizations have the clear structural changes and the restructure
of banks are happening aggressively to establish a functioning financial markets, which are
safe and effective.
However, the economy also exist many potentially risky, difficult challenges because
the result does not solve the hot growth period such as the period before 2008 or the difficulty
of political & economy instability both in the country and the world in four years back here,
the figures reported by the credit institutions shows that the percentage of bad debt increased
steadily. Therefore, many weak banks are planned to be merged series by SBV, the following
table compares the rate of NPLs of the Bank have the same size with MB
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30
Table 3.1: NPLs (group 3 -5) of five’s bank same size with MB
No
Name
2009
2010
2011
2012
2013
2014
1
Vietinbank
0.61
0.66
0.75
1.46
1.00
1.11
2
BIDV
2.82
2.71
2.96
2.90
2.37
2.03
3
Vietcombank
2.40
2.80
2.03
2.40
2.73
2.31
4
ACB
0.41
0.34
0.88
2.46
3.00
2.17
5
Sacombank
0.64
0.53
0.57
2.04
1.44
1.18
6
Mbbank
1.93
1.92
1.61
1.85
2.44
2.72
Source: Banks Annual Report (unit: %)
However, with many hard efforts, Military Commercial Joint Stock Bank developed
the scale of operation to overcome difficulties and have grown significantly with impressive
progress, excellent crossed the crisis period 2008 - 2012 with positive results: in 2014, the
equity has increased to 11,594 billion dong, total assets amounted to 200,489 billion dong,
which is shown in the table:
Table 3.2: Owner’s equity and total assets of MB
Unit: Billion VND
2013
Year
Criteria
2012
2014
2013/2012
Value
2014/2013
Value
+/-
%
+/-
%
Charter Capital
10.000
11.256
1.256
12,5%
11.594
338
3,0%
Owner’s Equity
12.864
15.148
2.284
17,7%
16.561
1.413
9,3%
Total assets
175.610
180.381
4.771
2,7%
200.489
20.108
11,1%
Source: Annual Report
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31
Garph 3.1: Owner’s equity and total assets of MB
Source: Annual Report
Income before tax for the MB is stable through the years especially in 2012, when
Vietnam's economy was at the bottom. However, in general difficult conditions and market
fluctuations, MB still maintained its operations and overcame difficulties.
Table 3.3: Business Performance of MB
Unit: Billion VND
Year
Criteria
2013
2012
Value
2014
2013/2012
+/-
%
Value
2014/2013
+/-
%
Incone before tax
3.090
3.022
- 68
-2,2
3.174
152
5%
ROE (%)
20,6%
16,6%
- 3,9%
-19,27
15,8%
-0,8%
- 4,9%
ROA (%)
1,5%
1,3%
- 0,2%
-13,3
1,3%
-
-
Source: Annual Report
In 2014, pre-tax profit of MB reached 3,174 billion, increase by 5% compared to 2013.
This helps MB continues to affirm its financial position, is one of the Top 5 Commercial Bank
of Vietnam (not including the new state-owned banks just transfer into joint stock banks), has
the highest operating profit, pre-tax profit targets constitute performance - profitability ratio on
equity (ROE) and return rate on total assets (ROA) is very good compared with other
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commercial banks in Vietnam. The impressive growth of profit before tax to be shown by the
following chart:
Figure 3.2: Income before tax
Source: Annual Report
3.3
Lending
In the operation of a commercial bank, the two core activities is still raising capital and
lending, due to specific sources of stable capital mobilization, the lending activity of Military
Commercial Joint Stock Bank had the steady growth and safety over the years. MB has
implemented growth-oriented firm, good governance and respected the quality of lending and
bad debt control. MB also took advantage of the opportunity in the crisis, when their
competitors in the market have difficulties in raising capital. MB has done credit tightening
policy, reducing the size of the loan growth. As a result, MB has attracted many potential
customers both from its rivals and in the market, so that in this period, even though the market
faced many difficulties but Military Commercial Joint Stock Bank is still grown in lending
activity, and are always approved by SBV with lending growth rate in the sector's high group
(average of 17% / year)
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Figure 3.3: Performance of loans
Source: Annual Report
About the structure of term lending , Military Commercial Joint Stock Bank has a
strong focus on the short-term loan segment with the percentage of short-term loans are
accounted for over 60% of total outstanding loans to banks, structure of lending under specific
time is shown in the following table:
Table 3.3: Structure of loans according to the terms
Unit: Billion VND
Year
Criteria
Loan’ outstanding
2012
Proportion (%)
Loan’ outstanding
2013
Proportion (%)
Loan’ outstanding
2014
Proportion (%)
Shorterm
Middle and
long term
Total
53.084
20.081
73.165
73%
27%
100%
63.664
22.308
85.972
75%
25%
100%
62.167
35.939
98.106
65%
35%
100%
Source: Annual Report
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34
Along with promoting development loans, MB always pays attention to the
management of bad debt risk control and the quality of loan lending. Therefore, the lending
activity of Military Commercial Joint Stock Bank is always in a safe threshold.
Table 3.4: NPLs
Unit: Billion VND
No
Criteria
Year
2012
2013
2014
1
Total outstanding loan
73.165
85.972
98.106
2
Overdue loans 2÷5
4.398
6.043
5.227
6%
7%
5%
NPLs (Group 3÷5)
1.370
2.145
2.744
Loans Group (%)
1,85
2,44
2,72
Proportion (%)
3
Source: Annual Report
3.4
Other activities
Capital mobilization: In the business of a bank, funding and capital structure is always
the decisive factor in the scale and scope of operations, it is also the basis for ensuring
business activities of the Bank, as well as the competitive basis of that bank in the financial
market. Although MB also being influenced in bank interest rate war, the capital of MB is still
stable with consistent growth over the 2012, 2013, 2014 is 117,747 billion, 136,089 billion
and 167,609 billion respectively.
Domestic Payment Operations: Since 2002, Military Commercial Joint Stock Bank has
officially participated in the electronic interbank system payment thus increasing the payment
speed and attracting a large number of customers to open deposit accounts and contributes
charges for bank services.
International payment operations: Military Commercial Joint Stock Bank has
correspondent relations with banks around the world, with a relatively good export customer
base so that the international payment turnover in Military Commercial Joint Stock Bank
increased over the years.
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35
Trading foreign currencies is one of the new activities being promoted by MB in recent
years. In particular, in 2008, MB has completed positive credit rating project, which is
performed foreign consultants partners, to ensure foreign currency business is promoted to a
new level and contributed more to the total income of the whole bank.
Other services: this is safe income, less risk than loan receivables, so MB has invested
to build and develop strong infrastructure system and information system upgrades core T24.
In 2014, MB implemented the upgrade to version R13 in order to increase utility for customers
as well as upgraded many services such as Internet Banking, Mobile Banking, automatic teller
machines (ATM) and POS (POS), digital certificates BankPlus CA, Western Union money
transfer services, electronic tax filing services ... With operational ATM, Military Commercial
Joint Stock Bank is a member of the biggest card associations in Vietnam, Smartlink card
alliance. ATM card of MB combines multiple gadgets such as cash withdrawal, money
transfer, bill payment services of purchasing goods, payment of mobile phone fees, visa card
and so on.
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CHAPTER 4
ANALYSIS OF SMEs CREDIT QUALITY AT MILITARY BANK
4.1
Real situation of SMEs credit quality at MB
4.1.1 Regulations of SMEs credit granting and credit rating at MB
According to the Decision No. 838/QĐ- HS issued on March 20 2015 about centralized
credit granting procedures: SMEs include enterprises of all economic sectors satisfying
following criteria:
- Total assets: under 500 billion dong;
- Net revenue: under 1,000 billion dong;
- SMEs include:
o Category of SMEs with ultra-small scale: Revenue value under 20 billion
dong
o Category of SMEs with small scale: Revenue value between 20 billion
dong and 200 billion dong
o Category of SMEs with medium scale: Revenue value between 200 billion
dong and 1,000 billion dong.
There is considerable difference between the Criteria to classify SMEs at MB and
guidelines according to the Decision No. 56/2009/NĐ-CP issued by the Government. The
details are as follows:
Table 4.1: SMEs classification criteria comparison
Government Decision’s Criteria
Similar points
MB Criteria
Same classifying criteria: total sources (or total assets on the Balance sheet)
Different points:
- There are two classifying criteria: total
assets and net revenue
There are two classifying criteria: total
- Besides, there are also other criteria
sources and number of employees
related to size of loan, size of customers’
deposits.
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Maximum size of total sources: 100 billion - Maximum size of total assets: 1,000
dong
billion dong
SMEs are classified according to their
There is no sectorial classification of SMEs.
business sectors.
According to the Decision No. 1346/QĐ-HS issued by MB CEO on 28/0/04/2008
guiding credit rating of institutional customers at MB, SMEs borrowing from MB will be
scored on the basis of some fundamental criteria such as: Financial indicators based on
Business performance results, credit relations and credit quality of current loans, borrowers’
business experiences in the business involving, project and/or business plan effects, etc. on
which customers classification into different categories. To the category of credit ratings, MB
will apply relevant lending conditions. Following is the table of credit rating categories at MB
Table 4.2: Score classification of credit ratings
Total scores
Rating
Loan classification
From
To
91
100
AAA
Current
81
90
AA
Current
71
80
A
Current
66
70
BBB
Special mentioned
61
65
BB
Special mentioned
56
60
B
Sub-standard
51
55
CCC
Sub-standard
46
50
CC
Doubtful
41
45
C
Doubtful
0
40
D
Loss
4.1.2 Analysis of lending activities and quality of SMEs outstanding loan at MB
4.1.2.1 Lending activities and quality from outcome indicators
SMEs lending activities
The number of SMEs customers are in transactional and credit relations with MB have
increased over the years, matching with MB outstanding loan’s target.
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Table 4.3: The number of SMEs in credit relation with MB
Unit: The number of customers
Year
Target
The number of
SMEs in
transactional
relation with MB
The number of
SMEs in credit
relation with MB
Proportion (%)
2012
Value
2013
2013/2012
+/%
Value
2014
2014/2013
+/%
32.330
39.940
7.610
23.5%
49.140
9.200
23%
3.218
4.013
795
24,7%
6.430
2.417
60,.2
%
9.9%
10.04%
13.8%
Source: SMEs Division report
Even though MB sets up credit rating criteria, the bank can approve granting credit for
those who do not meet the requirements of credit rating. However, the number of borrowers of
this type has descended year by year. Following is the table showing this trend:
Table 4.4: The number of SMEs meeting requirements of credit rating
Unit: The number of customers
Year
Criteria
No. of SMEs granted credit
No. of SMEs involving credit
rating
No. of SMEs not meeting
requirement of credit rating
The ratio of SMEs not meeting
requirement of credit rating
2012
2013
2014
3.218
4.013
6.430
2.144
3.531
5.971
1.074
481
459
33,3%
11,9%
7,1%
Source: SMEs Division report
Actual situation of SMEs’ overdue loans and non-performing loans
In order to assess the actual status of SMEs credit quality, the criteria of overdue status
are of importance. The criteria reflect the quality of SMEs’ loans as well as the possibility to
collect debt. As a matter of fact, MB always wants to maintain a low rate of overdue loan to
secure its operation
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Table 4.5: SMEs’ overdue loan proportion
Unit: Billion dong
No
Year
Criteria
2012
2013
2014
27.756
32.911
38.149
1
Total SMEs outstanding loans
-
Group 2
1.228
2.028
1.421
-
Group 3
171
143
144
-
Group 4
281
156
156
-
Group 5
173
896
898
2
SMEs overdue loans (Group 2÷5)
1.854
3.225
2.620
6,87%
9,80%
6,68%
626
1.197
1.198
2,26%
3,64%
3,14%
3
-
Ratio of SMEs overdue loans/total SMEs outstanding
loans (%)
SMEs non-performing loans (Group 3÷5)
Ratio of SMEs non-performing loans/total SMEs
outstanding loans (%)
Source: SMEs Division report
The table indicates a high ratio of SMEs overdue loans, the ratio was much higher in
2013, which reflects properly that the difficult situation of economy has negatively impacted
on SMEs. In addition, the rate of SMEs non-performing loans has been larger than average
rate of the whole MB’s non-performing loans. In most of the years whose the ratio of SMEs
overdue and non-performing loans over total MB’s overdue and non-performing loans was
higher than the ratio of SMEs outstanding loans over total MB’s outstanding loans. This
indicates that credit granted for SMEs has incurred higher level of risks than other customer
categories. Following table clearly shows in details:
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Table 4.6: Indicators of SMEs lending in comparison with MB lending
Unit: Billion dong
Year
Indicator
No
1
Total
outstanding
loans
2
Overdue loans
3
Proportion of
overdue loans
(%)
4
NPLs
5
Proportion
NPLs (%)
Total MB
SMEs
- Proportion (%)
Total MB
SMEs
- Proportion (%)
Total MB
SMEs
Total MB
SMEs
- Proportion (%)
Total MB
SMEs
2012
2013
2014
73.165
27.756
37,9%
4.398
1.854
42,1%
6,02%
85.972
32.911
38,2%
6.043
3.225
53,3%
7,02%
98.106
38.149
38,8%
5.257
2.620
49,8%
5,35%
6,6%
9,79%
6,86%
1.370
626
45,6%
1,85%
2.145
1.197
55,8%
2,44%
2.774
1.198
43,2%
2,72%
2,26%
3,64%
3,14%
Source: MB Credit Statement
The proportion of overdue loans are transparently illustrated in the following Graph:
Graph 4.1: Proportion of SMEs overdue loans
Source: MB Credit Statement
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Graph 4.2: Proportion’s NPLs of SMEs
Source: MB Credit Statement
As a results, in general, the SMEs overdue and non-performing loans proportion at MB
has been of acceptable status. Nonetheless, the upward trend regarding absolute value and
comparative value in 2013 was so noticeable. MB should study and apply risk management
approaches to enhance the quality of SMEs credit activities.
Structure of overdue loans
So as to clearly understanding MB credit quality, the structure of overdue loans is
considered according to criteria as follows:
- Structure of overdue loans by terms
Corresponding to the the ratio of short-term, medium-term and long-term outstanding
loans over total SMEs outstanding loans, SMEs overdue and non-performing loans also
account for respective proportion of terms’ outstanding loans. The proportion of SMEs shortterm overdue and non-performing loans often account for approximately two-thirds of total
SMEs overdue and non-performing loans, which is completely suitable for MB credit
attributes and it is relatively reasonable. These ratios are shown in following table:
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Table 4.7: Structure of SMEs overdue loans by terms
Unit: Billion dong
Year
Indicators
No.
1
2
3
-
2012
2013
2014
Total SMEs outstanding loans
Short-term outstanding loans
Proportion (%)
Medium-term outstanding loans
Proportion (%)
Long-term outstanding loans
Proportion (%)
27,756
19,679
70.9%
6,945
25.2%
1,082
3.9%
32,911
25,209
76.6%
6,680
20.3%
1,020
3.1%
38,149
30,519
80.0%
6,218
16.3%
1,373
3.6%
SMEs overdue loans
Short-term overdue loans
Proportion (%)
Medium-term overdue loans
Proportion (%)
Long-term overdue loans
Proportion (%)
1,854
1,346
72.6%
333
18.0%
174
9.4%
3,225
2,267
70.3%
806
25.0%
148
4.6%
2,620
1,883
71.9%
461
17.6%
275
10.5%
SMEs non-performing loans
Short-term non-performing loans
Proportion (%)
Medium-term non-performing loans
Proportion (%)
Long-term non-performing loans
Proportion (%)
626
502
80.2%
122
19.5%
2
0.0%
1,197
1,198
790
938
66.0%
78.3%
328
195
27.4%
16.3%
80
65
6.7%
5.4%
Source: MB Credit Statement
- Structure of overdue loans by collateral
Due to limited financial capability, collaterals are always hindrances for SMEs when
accessing bank loans. The situation is especially difficult in case the bank does not apply
flexible collateral policy.
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Table 4.8: Structure of SMEs overdue loans by collaterals
Unit: Billion dong
Year
Indicator
No.
1
2012
SMEs overdue loans
In which:
Secured loans
Proportion (%)
Unsecured loans
Proportion (%)
SMEs non-performing loans
In which:
Secured loans
Proportion (%)
Unsecured loans
Proportion (%)
2
1,854
1,792
96.7%
62
3.3%
626
583
93.2%
43
6.8%
2013
2014
3,225
2,620
3,218
2,394
99.8%
91.4%
7
226
0.2%
8.6%
1,197
1,198
1,192
1,175
99.6%
98.1%
5
23
0.4%
1.9%
Source: MB Credit Statement
When the economy varies, secure operation has been of MB’s priority. Therefore,
recent credit policy is to reduce granting loans without collateral, applies the principle of
maintaining the rate of unsecured loans less than 25% of total SMEs outstanding loans.
Moreover, MB approves flexible policy of granting loans with collaterals of not only valuable
papers, real estates, vehicles, machine and equipment but also other types of assets such as:
inventory, account receivables, collaterals generated from loans, etc. to secure the loans
- Structure of overdue loans by currencies
SMEs non-performing loans at MB are mainly in VND, with a proportion of more than
80% of total non-performing loans, which matches with the features of SMEs demand for
VND loans due to their domestic transactions. The rate of SMEs involving in import activities
is low. The non-performing loans proportion with currency classification is presented as
follows:
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Graph 4.3: SMEs non-performing loans by currencies (VND and Foreign currencies)
- Structure of overdue loans by regions
The structure of SMEs outstanding loans is regionally distributed with strong change in
2013. In stead granting funds in Ha Noi and the Northern area, MB credit activities have
shifted towards other areas especially Ho Chi Minh and the Southern area. The proportion of
non-performing loans moves in the same direction with that of SMEs outstanding loans at
MB, which means that non-performing loans concentrate at areas with large amount of
outstanding loans like Ha Noi, the Northern excluding Ha Noi. Following figure illustrates the
details:
Graph 4.4: Outstanding loan distribution by regions
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Graph 4.5: Non-performing loan distribution by regions
While SMEs outstanding loans shift from the Northern areas to the Southern areas, the
proportion of non-performing loans in the Northern accounts for large percent. This is because
amount of outstanding loans granted has descended in Ha Noi and the Northern area
(excluding Ha Noi) from 15.5 thousand billion dong in 2012 to 10.3 thousand billion dong in
2013, or equivalent to a reduction of 33% of outstanding loans. Fostering credit granting in Ho
Chi Minh and the Southern area somehow resulted in descending proportion of nonperforming loans in this areas. The details can be seen in the following table:
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Table 4.9: Proportion of non-performing loans by regions
Unit: Billion dong
No.
1
2
3
4
5
Year
Indicator
2012
2013
2014
Hanoi
NPLs
Proportion (%)
15511
219
1.4%
10345
489
4.7%
12.955
539
North (not included Hanoi)
NPLs
Proportion (%)
Middle
NPLs
Proportion (%)
Hochiminh
NPLs
Proportion (%)
5.316
132
2.4%
1.371
43
3.1%
4.384
201
4.5%
7.380
284
3.9%
6.322
175
2.8%
4.839
204
4.2%
6.987
327
4.7%
4.269
102
2.4%
9.045
171
1.9%
South (not included HCM)
NPLs
Proportion (%)
1.171
29
2.4%
4.022
4.890
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1.1%
1.2%
Source: MB Credit Statement
4.2%
- Structure of overdue loans by sectors
As the proportion of outstanding loans by sectors, the overdue and non-performing
loans rate focuses on sectors with large proportion of SMEs outstanding loans of SMEs
sectorial outstanding loan structure. Over the years, the proportion of sectorial non-performing
loans varies due to MB policy of limiting or prohibiting granting funds for sectors that may
occur high level of non-performing loans. On the basis of sectors’ real situation and MB credit
quality, the credit policy in 2015 reveals that there are MB limit or prohibit granting credits
towards some business sectors such as steel and steel manufacturing (belonging to heavy
industry),
construction materials production, sea-shipping, seafood processing, electronic
devices distribution, etc. These business sectors have generated large amount of nonperforming loan over the last three years.
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Graph 4.6: Structure of SMEs non-performing loans by sectors
Source: MB Credit Statement
Turnover of SMEs credit
This information reflects credit quality which depends on 2 criteria: revenue from debt
collection and average outstanding loan. The larger the revenue from debt collection is, the
higher turnover of credit. Besides, the credit quality depends on bank’s structure of loans by
terms, there is an inverse between the credit quality and terms of loans.
Therefore, the interpretation from credit turnover can be used to add to the conclusion
of bank’s credit quality. MB SMEs credit turnover is detailed as follows:
Table 4.10: SMEs credit turnover
Unit: Billion dong
No.
Year/Indicator
1
2
Sales of SMEs debt collection
SMEs’ average outstanding loam
3
SMEs credit turnover (turn/year)
4
SMEs average credit turnover (turn/year)
2012
2013
2014
75.485
27.756
90.505
32.911
108.746
38.149
2.72
2.75
2.85
2.78
Source: MB Credit Statement
It can be said that years between 2012 and 2014 are the time phase when MB focused
on granting short-term loans, MB’s SMEs credit turnover seems stable and slightly fluctuates
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around 2.78 turns per year. This indicates that collection of SMEs debts has been stable and
reasonable.
4.1.2.2 Credit activities and quality interpreted from procedures
According to the Decision No. 383/QĐ-HS issued by MB CEO on March 20 2015
about applying centralized credit granting procedure for institutional customer in which stages
of the procedure are separated into specific stages and executed by independent units as
follows:
Table 4.11: Different stages of MB credit granting procedure
No.
1
Stage
Selling
Executing unit
Branch:
Main tasks
customer Establish, exploit, and maintain the relations with
relation executive
customers in order to provide them with banking
services. Collect information and customers’
borrowing paper. Be responsible for the papers’
accuracy and trustworthiness.
Evaluate and set up credit limit for customers on
the basis of risk level and borrowing demand of
each customer, responsible for collateral valuation.
2
Appraisal
Head-quarter’s
Appraise customers, business plans or projects
Appraisal division: granted funds, appraise collateral on the basis of
appraisal executive
valuation results made by valuation company.
Execute credit rating by using software of credit
rating. Assess risk level, determine value, structure
of amount of fund granted as well as related credit
articles aiming at risk management, and submit to
relevant approval levels.
3
Approving
Head-quarter’s
Based on risk taste, credit policy of each period of
appraisal division: time, balance between risk and benefits if
approving
approving
specialist
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4
Operating
Head-quarter’s
Conduct legal review and regulations’ compliance,
operation division: internal procedure to ensure matching with
supporting
approval requirements before disbursing towards
executive
each customer/loan
Prepare
and
procedures
sign
credit
related
to
paper,
collaterals,
complete
check
disbursement documents and disburse, remind
customers and collect.
5
Credit
Risk
supervising
and
management Operate early warning system to detect, prevent
internal and manage credit risks.
inspection
and Supervise periodically and suddenly business
control divisions – plans, projects funded by banks, check lending
Head-quarter
conditions in accordance with content approved.
Suggest and together implement quick collection
approach in case there are signals of risks with
possibility of overcome.
6
Stage
of Debt management Manage list of problem debt, propose and
handling
Center
problem
quarter,
debt
granting
–
Head- implement methods to restructure debts, and
Branch directly carry out non-performing loans collection.
Even though MB’s credit granting procedures were separated into different stages and
executed by different divisions in order to make it independent and objective as well as control
the compliance of divisions in granting funds for SMEs, current credit granting procedure has
still revealed some drawbacks resulting in MB SMEs credit quality managing activities are
under expectation:
Credit granting procedure totally separates selling function with operation of
disbursement, however, appraisal and approving stages, regardless of being totally
independent, are still under the control of Appraisal Division. As a result, to some extend, the
loan appraising and approving lacks in the objectiveness due to the fact that appraisal
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performer under pressure of being controlled by approving specialists, then, approving
specialists’ viewpoints are not independent to assess the balance between risk and benefits for
MB anymore.
As for this credit granting procedure, MB has tightly managed selling – appraising –
approving – disbursing stages, however, at the stage of credit supervising, there is unclear
separation of risk management and internal inspection and control. According to MB’s credit
granting procedure, these two divisions’ tasks are not completely clear: who is responsible for
direct checking credit and managing at branches. As a result, credit supervising is both
overlapping and inadequate, which happens at the stage of problem debt management.
4.2
Evaluation of MB SMEs credit activities and credit quality management
In most of the years when the proportion of SMEs overdue and non-performing loans
of the whole MB’s overdue and non-performing loans was greater than that of SMEs
outstanding loans of the whole MB’s outstanding loans. This shows that SMEs credit activities
expose higher risk than other types of borrowers which deserves serious concern.
4.2.1 Issues of lending policy and operation orientation
MB lending orientation over recent years is to expand credit granting scale in the
Middle area, Ho Chi Minh, and the Southern area which are new market that MB has lately
accessed since 2012 – 2014. As a matter of fact, MB has opened near 30 branches in these
areas, however, MB’s market research outcome and credit policy have not yet caught up with
this area’s SMEs business attributes. For example, SMEs in the Southern area mainly focuses
on agricultural products such as rice, pepper, cashew, etc.; seafood like fish, shrimp and so on.
By and large, the business attributes appear risky because their business performance depends
on weather, fertilizer price, breeding food, or consumption market. The potential risk results in
non-performing loan proportion in this sectors at MB has been at high level with 10% of total
MB’s SMEs non-performing loan in 2013.
As for each loan at MB, customer is assessed with internal credit rating system with
lost of criteria like financial indicators, total assets recorded on the financial statements.
Additionally, MB also evaluates customers and SMEs managers’ experiences in their business
sectors involving the loans as well as customers’ organizational business model, etc. Such
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assessment enables MB to exactly evaluate SMEs, then, make reasonable and fast decision of
lending along with maintaining a secure rate of overdue loan. Because it is SMEs features that
they record and keep booking without care, tax accounting reports do not reflect truly their
own business performance. That is the reason why MB still approves some SMEs borrowings
regardless of their insufficient capabilities. The proportion of this type of customers accounts
for 7% of MB’s borrowers.
4.2.2 Person’s issues
Bank staff’s working competence: personnel quality is always the leading factor that
MB should be concerned with. With stern recruiting policy accompanied with basic,
specialized training program, MB has owned a generation of well trained, professional,
responsible and moral staff. They are capable of checking, supervising loans, ensuring loans
being used with right purposes and well-timed collection.
Ineffective customers management: with about 400 SMEs customer relation executives,
on average, one executive has to manage about 120 SMEs and 95 billion dong of outstanding
loans. The number of SMEs per each customer relation executive, managing so many SMEs
causes the overload status in loan management such as following approval requirements:
periodically checking customers’ business performance, revaluating collateral, collecting
financial statements, etc. collecting market information related to SMEs involving so as to
make forecast of market trend as well as timely evaluate customers’ business performance,
detect early potential risks affecting each SMEs’ credit quality.
Uneven appraising quality: Appraising officer’s quality are not of the same level.
4.2.3 Issues of procedures
Enhanced quality of SMEs credit: Credit granting procedure has been implemented
effectively internally. Positive point of this procedure is the separation of appraising,
approving and disbursing from branch’s responsibility ensuring that branch just focus on
selling and credit management, at the same time, lending time is reduced without damaging
the independence of risk management. Risk management and internal inspection and control
divisions manage vertically from head-quarters to each branch, frequently coordinate together
check customers’ fund using and pay enough attention to debt collection.
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Insufficient quality of the internal inspection and control: Although the internal
inspection and control was much concerned, MB has made significant investment in this field
with the establishment of internal inspection and control division to perform the functions of
internal inspecting and controlling all bank’s activities. However, most of inspecting officers
mainly work at bank office and analyze the data for solutions without actual survey at
branches and customers. On the other hand, the branch network has been expanded through
the years while bank resources are limited, therefore, most of the internal inspection and
control officer have to manage operations of many business units, this has affected the
effectiveness of the operation controlling activities.
Unsatisfactory bank technology: MB’s technology system has not supported business
units with automatic report system, and credit risk management towards each customer. Most
of them have kept track, reported criteria of lending, outstanding loan, overdue loan, etc.
manually.
4.3
Causes
4.3.1 On MB’ side
Credit granting policy: not yet catching up with market fluctuation and SMEs’
business attributes even though MB has made adjustment for suitability with slower speed
than other competitors.
Uneven human resource quality: Although MB has owned a skilled, well-trained
customer relation team, with so fast growth of operation scale, over the last few yeas, there has
been high pressure on personnel issues, resulting in overload status of loan managing and
customer care activities.
High level of customers’ concentration: According to statistics of SME Division, there
are 80% of total revenue from SMEs customers (including revenue generated from all banking
products: borrowing, deposit, underwriting, international settlement, etc.) focusing on only
5.6% of total SMEs. This indicates high level of risk concentration on SMEs list. If there is
any change in the relation between these customers and banks, or in case they fall in difficult
situation, SME division’s operation, especially its lending activities will be severely affected.
Not good quality of customer appraisal: With the new credit granting procedure, the
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appraisers are completely independent, specialized, hold good basic qualifications. However
the MB appraising staff are mainly persons that are recruited from customer relation team
with average level of practical experience of 1 year, most of them lack in practical
experiences. Moreover, the majority of appraising staff are women, they are often afraid of
real customer visiting and meeting, resulting in unprofessional handling complex
transactions. Therefore, the independent appraisal procedure sometimes is theoretical and
inflexible, the information of independent appraisal report was largely taken from the credit
report of the customer relation staff. Meanwhile, customer relation staff are now assigned
pressured targets, they work with psychology of chasing sales and sometimes they don’t
carefully evaluate and appraise customer.
Lack of collective information of sectors – economic impacts on sectors that MB
grant funds: SMEs operates in various sectors of the economy, each sector is disturbed by
many factors of natural, socio-economic environment, domestic and foreign consumption
market, etc. Hence, branch’s sales forces and appraisers need collective information to
analyze so that they are able to make lending decision as well as appraise, approve
adequately loans like periodical report of agricultural sector, steel industry, seafood, plastic,
petroleum, and so on.
4.3.2 On SMEs side
- Financial management abilities: The majority of SMEs’ are of limited financial
capacity, or their financial management has not been so good. At the same time, the
implementation of the Ordinance on accounting and statistics of SMEs has not been serious
enough. SMEs often apply two bookkeeping regimes: one is for internal monitoring and the
other is for tax reporting purposes. SMEs’ financial statements are not often audited, therefore
there is a lack of transparency and honesty in the financial information. As a result, the bank
has no basis to evaluate decisions about the loan size, term and forms. On the other hand, the
unprofessional management leads to low operational efficiency, then, there exist potential
risks.
- Business and production plan: because people working for SMEs are normally of low
level of knowledge and quality, SMEs have not prepared feasible business plan, or a suitable
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production plan in order to convince banks to grant funds. That is the reason why it is difficult
for bank to appraise customers as well as borrowing plan leading to potential risk due to
imperfect information.
- Collateral: SMEs property are normally legally insufficient, and of low level of
marketability. Therefore, when enterprises operate ineffectively, it is difficult to process
collaterals, resulting tough debt collection, hence, increasing credit risk.
- Technological capability: outdated machine and equipment result in limited business
efficiency, competitiveness as well as ability to access bank loan.
4.3.3 Other causes
- Economic environment: In recent years, although the economic status has been stable
and recovered gradually, it still exposes potential risks and uncertainties due to the difficulties
from previous years’ consequences which have not fully resolved. SMEs were seriously
affected because they are subjects that can not cope with many adverse shocks from the
market. One of those difficulties is that all the input markets, output markets, domestic market
and foreign markets have unpredictable fluctuations. Meanwhile, the Government’s
macroeconomic adjustment is, in fact, inefficient without feasible solutions. When the market
fluctuates, SMEs will face up with many obstacles because of their limited competences, the
operation scales can be declined or even lead the company to bankruptcy. As a result, the
quantity and quality of SMEs customers borrowing from the bank decreased.
- Legal environment: System of legal documents, mechanism, policies to support SMEs’
operation does not synchronize with SMEs credit activities. Managing SMEs encounters some
obstacles such as: many SMEs were licensed with the capacity beyond their real competence
and practical experiences, many SMEs have been dishonest in their business reports, tax
evasion has been still popular. This has caused difficulties for the banks in in managing SMEs’
loans and recognize the abnormality in SMEs activities to manage the credit risks.
Competitive environment: Nowadays, banks, especially joint stock commercial banks
and foreign banks’ branches in Vietnam, have reinforced market segment of SMEs in
Vietnam. Most of banks apply similar credit policy towards SMEs; therefore, if their services
are not good enough, SMEs whose credit quality is worthy are willing to switch into another
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bank. Thus, the credit growth is the main cause that banks ignore all standards about credit
granting like that risk management , credit quality management.
Ineffective operation of credit information: the risk-preventing information system in
lending activities are inadequate and weak. There has not been a credit information center
which is strong enough to provide useful information for credit institutions. At present, SBV’s
Credit information center just provides fundamental information related to debt balance and
credit status, customers’ collaterals at other Credit institution, while other information is of
low quality.
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CHAPTER 5
SOLUTIONS AND RECOMMENDATIONS TO IMPROVE CREDIT QUALITY AT
MILITARY BANK
5.1
Solutions to improve credit quality among SMEs at Military Bank
As can be seen from analysis results in chapter 4, credit activity and credit quality
among SMEs at MB was affected by following main factors: (1) Existing problems in the
market in earlier years that have been resolved, (2) SMEs has limitations about resources, (3)
Credit extension to SMEs focuses on just a small number of enterprises with large amount of
loan, thus when this clientele faces difficulty, credit quality of SMEs’ loans fluctuated wildly,
(4) There are still bottlenecks in credit extension procedures at MB. Based on these
conclusions, the author gives out following solutions and recommendations to improve credit
quality of this clientele and to sustainably and effectively boost credit activity:
5.1.1 Suitable credit policies
The bank needs to have timely solutions and policies to help SMEs to solve
difficulties. In case analysis shows that reason for overdue loans belongs to the client, the bank
should implement actions such as loan extension, loan rescheduling or reduce a portion of
interest in order to allow the enterprise to stabilize its business. At the same time, the bank can
also partly support the enterprise so that it can maintain its operation and in turn have income
to repay loan.
MB should decline and stop to approve to granting customers who are under standard
of credit rating.
5.1.2 Diversify credit activity to SMEs
Credit needs of SMEs are diverse in terms of amount, purpose and duration because
they are involved in a wide range of industries and sectors. Therefore, to achieve objectives of
credit quality management and improvement, the bank should diversify its portfolio of
financing and loan products as well as sectors in order to meet the needs of each borrower and
to manage credit extension activity and credit quality in a suitable way.
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Credit extension method: MB should develop and portfolio of financing products for
SMEs only and deploy different ways to make loan to SMEs:
- Discount valuable paper (an indirect credit extension method): During operation,
enterprises hold valuable papers such as bill of exchange, bill of credit, bond that have not due
at the time the enterprise have a newly arising need for capital. In this case, enterprises can ask
the bank to accept the paper at a discount to have working capital.
-
Discount export documents: the product supports export companies that have
immediate need for working capital after shipping by giving discount on bill of exchange
enclosed with export documents under D/A, D/P, L/C arrangement or money transfer through
TTR.
- Overdraft: in case enterprises want to make a payment that is higher than the
available amount in their accounts to make up for the shortfall amount of working capital in a
short time (for example to pay salary, tax, telephone bill, purchase of materials, etc.) while
waiting for payment for business partners.
- Inventory and accounts receivable financing: this is a solution to help enterprises
cope up with difficulty with loan collateral and thus get access to bank loan.
- Pre-shipment export financing with L/C as collateral: enterprises’s need for working
capital to fund manufacture of export products for orders that will be paid by L/C.
Diversify sectors: Having 80% of its revenue from only 5.6% of its SME borrowers
signals a high concentration of risk in the bank’s portfolio (international standard is 80-20).
Hence, MB must actively diversify clients from different industries and decrease its
dependence on only a small number of clients. To do that, the bank should lend to different
clienteles with differing sizes and industries. At the same time, it should also attract new
potential groups of clients, turn existing clients into loyal clients, take good care of clients and
closely monitor their business to gain active control over credit quality.
Besides, the bank should design special financing products the suits particular
industries or groups of clients in a special area. For instance, it can finance feed producers,
rubber collectors and exporters, rice enterprises…to diversify the business activites acorrding
to areas in Vietnam.
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By segmenting its products according to different industries of SMEs, the bank can
control and devise specific and more effective solutions to overdue loans and bad debts among
SMEs. For example, when building new products, the bank should fully evaluate possible
risks involved to ensure no overdue loan or bad debt will happen due to implementation of the
products
5.1.3 Human resource
To build a good team of employees, the bank should continue to ensure a sufficient
number of high-quality staffs. The initial selection process is crucial to choose suitable people
with qualified competences. The bank should also strengthen and diversify training methods to
suit each position and each job: in-house training, on the job training, external professional
training, etc. It is important to assign and arrange jobs suitable to ability and experience of
each person and to have timely rewarding policies and motivation to encourage working spirit
of employees. Organizing professional tests is also a good idea.
Customer relation officers: design training on “consultancy sale” so that employees
can provide clients with advices on feasible business plans. By doing that, enterprises can
easily access loans and repay loans better.
Appraisal officers: these staffs must use credit analytical techniques well, particularly
6C principles:
- Capacity: make sure that borrowers have full legal and behavioral ability to sign
bilateral/multilateral agreements with the bank and related parties such as loan agreement,
collateral agreement, Minute of Undertakings, Memorandum of Cooperation
- Character: appraise purpose of borrowing and willingness to pay of the borrower.
SMEs are businesses that can easily change their business plans as well as loyalty to bank.
Therefore, appraisal officers must conduct prudent analysis of operation history, credit history
of the SME in the past and at present and at the same time predict level of cooperation and
loyalty of the SME to the bank.
- Cash: consider possibility to collect repayment from client’s sources of income by
analyzing income or revenue of the client in the past, at present and possible growth rate.
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- Collateral: in order to mitigate risks of the loan, collateral is one of necessary parts
that need careful evaluation. However, appraisal officers must access legal and liquidity
aspects of the collateral, legal ownership of the borrower or the guarantor.
- Conditions: appraisal officers must gain full information about industry, current
health of the business and future prospect of the borrower and how economic turmoil will
affect the loan.
- Control: evaluate factors such as: whether changes in laws and regulations negatively
affect the borrower and the loan? Whether the borrowing and repayment plans meet standards
of the bank on credit quality?
- Apart from 6C principles, appraisal officers must closely follow steps in credit
extension procedures and guidance on how to appraise a loan of different size, term and
industry issued by the bank. They are most important aspects to consider when appraising and
managing a loan so as to ensure effectiveness and quality of credit activity.
5.1.4 Procedure
Completion of credit granting procedure: even though the procedure has just been
implemented for nearly one year. It has appeared much unsound and not promote fully its
effieciency. SMEs division must be responsible for implementing credit granting procedure
with unification so that the operation is quick and clear, then, customer care is effectively
executed, and manage the credit quality effectively. Additionally, Bank Head-quarter should
support directly business units to develop customers, appraise practically customers so as for
product and service supply process to take less time amount and manage effiecienly the credit
quality.
Enhancing selling supporting capability and vertically manage: support branches with
customers seeking and developing by implementing customer development campaigns
simultaneously and drastically according to community bank methodology, as well as
development program referring large customers and military clients’ supply chains. Besides,
MB can take advantage of its relations with associations like SMEs association, young
businesses association, industries’ association, etc. in order to seek and choice a customers
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who satisfied the standard about credit granting’s MB, this is a filter of MB to choice
customer.
Enhancing credit supervising activities: Credit risk is the possibility of unexpected loss
for banks in case borrowers cannot repay timely, or they intend to delay or do not follow the
term of loans. If credit risk occurs, bank’s lending quality will reduce. Responsibility should
be clearly delimited among divisions of the whole system with one side of policy making,
supervising, checking policy execution and one side of performing risk management.
Reinforcing forecasting activities: socio-macroeconomic affects business such as
inflation, interest rate, exchange rate, business sectors, domestic and foreign market, etc.
Enhancing internal inspecting and controlling activiites: ensure compliance on the
whole system, supervising and controlling business units’ complying so as to prevent and
process risk generated from SMEs credit activities, minimizing credit risk. Internal inspection
and controlling activities have to be simultaneously and continuously implemented on the
whole system. The quality of internal inspection and controlling must be improved in order to
prevent and process risk factors generated from credit activities in general and SMEs credit in
particular. Internal inspection and controlling divisions should be reinforced regarding human
resources, credit - related professional skills among staffs and officers. At the same time, skills
of professionally, effectively inspecting and controlling practices should be enhanced. .
Internal inspection and controlling activity should be amended in the directions: for each loan:
all stages of granting credit must be inspected and controlled: inspecting before funding
(appraising), inspecting when funding (reviewing borrowing purpose, disbursing procedure),
and inspecting after funding (ensuring that customers make use of their money with right
purpose, effectively, and fostering them to repay principal and interest timely). For the whole
SMEs’ loans, there is a need to both periodically and suddenly inspect and control, ensuring
fully obeying: considering and classifying categories of customers; periodically revaluating
collaterals, controlling documents kept as archives at bank, check compliance of lending
procedures and policies, periodically inspecting in practice customer’s business performance.
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5.1.5 IT developement
T24 software of Temenos – Switzerland assessed as the most advanced in the world is
used at MB. Regardless of its preeminent features, bank has not made full use of the software.
At present, bank’s IT center has been invested and upgraded from R10 to R13 with more
modern applications to manage customer database, analyze, appraise, make lending decisions
quickly and exactly, lower time amount as well as cost effectively. Moreover, all bank staff
will be trained fundamentally and specialized so that they could master the software’s
applications.
5.2
Suggestions and conclusions
5.2.1 Suggestions
For SMEs: actively enhancing enterprises’ capabilities is also to reinforce enterprises’
competitiveness, investing in human resources and technologies, make full use of trading
sources in addition to bank loan.
For Government: stabilizing macroeconomics, expanding and fostering negotiation,
signing Bilateral agreements with regional countries and in the world like: Vietnam – Korea
Free Trading Agreement in 2015, Vietnam – Custom union of Rusia-Belarus-Kazakhstan Free
Trade Agreement in addition to continuing negotiation on Vietnam – EU Free Trading
Agreement, Trans-Pacific Strategic Economic Partnership Agreement (TPP), and joint
ASEAN economic community. These integrating activities enables to boost economic growth,
giving opportunity for all enterprises to foster their business and production activity.
For SBV: Amending information system of risk prevention in credit granting activities,
modernizing SBV’s credit information center to provide full and detailed information of credit
rating, collateral situation, financial statements at credit institutions.
5.2.2 Conclusion
SMEs are potential customer group that need to develop in the direction of growing of
MB over development phases. In which, MB determines boosting offering credit products to
SMEs parallel with managing and improving credit quality. SMEs division with the role of
being an unit managing list of SMEs at MB has applied credit policies, product and services
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that are suitable for Management Board’s common orientation of establishing strategy of
sustainable development of SMEs customers.
During time of research, with an advatage of working for SMEs division, deep
understanding credit activity and quality of loans granted for SMEs at MB, the author
combines theory and practice analysis of SMEs credit activity and quality in order to suggest
some basis solutions with expectation to contribute author’s capabilities to solve problems,
overcome difficulties and limitations partially in managing SMEs credit quality, hence, make
improvements towards SMEs credit quality. The thesis brings about outcomes such as:
- Systematize fundamental issues regarding banking credit quality
- Evaluate and analyze the actual situation and factors affecting MB’s SMEs credit
quality
- Propose some solutions and petitions aiming at improving credit quality, matching
with MB’s SMEs development orientation.
Even though the author spent a lot of time during research process, insufficient
knowledge and time limitation result in the fact that some issues and/or problems are not fully
and specifically studied:
- The research just focuses on SMEs customer while there are a lot a number Large
Enterprises
- The current trend of technology application in credit quality like that: manage
customer database (CRM), risk warning system, risk prediction system…
Enhancing SMEs credit quality is determined on the basis of various fields such asn
the diversification of credit products, clear credit policies, specific risk taste, standard internal
procedures, and risks managing and monitoring tools. To such requirements, the study of
solutions in order to improve SMEs credit quality widely and deeply, this also contributes
boost bank’s business effectiveness and SMEs. This orientation is especially meaningful
towards MB.
Enhancing credit quality is a quite large category and depends on various objective and
subjective factors along with the economy development as well as unprescribed fluctuations.
Moreover, the author awareness is limited to some extend. That is the reason why certain
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shortcomings occuring are avoidable. The author highly appreciates feedbacks from lectures,
instructors, managers, collegues, and those who are concerned so that the author continue
thesis’s amendment.
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Decision No 1627/2001 / QD - NHNN of the Regulation for credit institutions
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Phan Thu Ha, Dam Van Hue (2010), Commercial banks management, National
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19. http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/smedefinition/index_en.htm
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27. MB Credit Statement 2013
28. MB Credit Statement 2014
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