Improving the quality of consumer loans at Industry and Trade Bank - 2
Compared to deposits, the proportion of borrowed money in total capital is usually lower.
However, the loan is more stable because it only has to be repaid when it is due. Moreover, the loans have pre-determined terms and sizes, so the Bank can decide on the loan volume to suit its needs.
• Received capital:
This is the source received from banking and financial institutions, from the state budget to finance programs and projects on socio-economic development and environmental improvement. defined audience and goals.
• Have always been different:
Besides deposits and loans, the bank also has a small amount of capital, although it accounts for a small proportion, but also contributes to increasing capital sources for commercial banks. These are capital sources arising in the course of banking operations: agency, money transfer, banking services, trust capital, payment capital. The bank does not have to spend money to mobilize, and has good conditions to develop other operations and services to best serve the needs of customers.
Thus, capital mobilization is the main source-generating activity of commercial banks. Therefore, mobilizing and managing capital is always a top priority for commercial banks. The quality and quantity of mobilized capital are the factors that have the greatest impact on the capital use of commercial banks.
* Activities using capital
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Based on the amount of capital mobilized, commercial banks use capital to generate profits. Lending and investment operations are the most important capital-using operations, determining the viability and operation of commercial banks. Activities using capital of commercial banks include:
– Credit extension
– Other capital-using activities
Credit activities of banks are for the purpose of making a profit, but need to
must ensure safety to maintain customer’s trust. In order to gain the trust of the customer, first of all, the payment ability must be ensured: meeting the withdrawal needs of the customer. To do so, banks must set aside a portion of their unused capital to be ready to meet payment needs. This reserve is called reserve. The central bank is allowed to set a reserve requirement ratio from time to time, the payment of interest on required reserve deposits is determined by the government. Reserve includes:
– Primary reserve: includes cash, deposits at the Central bank, at other banks
Secondary Reserves: Reserves that do not exist in money but in securities, i.e. short-term securities that can be sold to convert into cash conveniently. This class includes: Treasury bills, accepted drafts, and other short-term promissory notes. The secondary reserve is only used when the primary reserve items are exhausted.
• Credit extension:
The remaining capital after setting aside a part of the reserve, commercial banks can use to provide credit to organizations and individuals. Credit granting activities include:
Is the credit service of commercial banks. In which, commercial banks will lend borrowers some capital for production, business, investment or consumption in a pre-agreed period. Customers who want to borrow capital must comply with certain conditions and legal constraints to ensure that the bank can recover capital when it is due. Borrowers have a sense of repayment, so it is imperative that they pay attention to the effective use of capital to repay the loan. Loans are less liquid assets than other assets, and have a higher risk of default, but banks get the highest return on loans themselves. In order to ensure the safe and effective lending activities of banks, when lending, banks use loan security measures such as mortgage, pledge.
This is an indirect lending operation, the bank will provide credit capital to one subject and another subject to repay the bank. Types of discounts include drafts, promissory notes, bonds, and other valuable notes.
– Financial leasing
It is a medium and long term credit. In which the bank uses its own capital or the capital from the issuance of bonds to buy assets and equipment at the request of the lessee and lease it for a certain period of time.
– Bank guarantee
In this type of operation, the customer is guaranteed by the bank to borrow money from another bank or to perform the signed economic contract.
– Other forms
Investment activities have the second most important position after lending activities, it brings large and significant income for commercial banks. In this operation, the Bank uses its own capital and other stable capital sources to invest in the following forms:
– Raising capital to buy shares and shares of companies; Capital contribution to buy shares is only allowed with the bank’s capital
– Buy government bonds, local governments, public bonds
All securities investment activities are aimed at bringing income. On the other hand, thanks to investment activities, the risks in banking activities will be dispersed, on the other hand, investing in government bonds will reduce the risk of loss. The risk will be very low. When necessary, the bank can sell them to increase the budget. Commercial banks also often hold company securities to have the right to participate in and control the activities of those companies.
• Other capital-using activities
The remaining capital-using activities that commercial banks are allowed to perform are:
enter into joint ventures with foreign credit institutions, participate in the money market, trade in gold and foreign exchange, establish affiliated companies, build or buy more houses to serve as offices, equipment and machinery. machinery, means of transport, building a system of vaults¼¼. However, the banking industry is a sensitive field that affects all aspects of the economy, so the bank’s business activities are under very strict management. strictness of the law.
* Service operations
The increasingly developed banking services both allow significant support for capital exploitation, expand investment operations, and generate income for the bank through commissions and fees. worthy position in the current development stage of commercial banks. These activities include:
– Payment services for customers (money transfer, check collection, credit card service, payment card ..)
– Receive and preserve valuable assets, important papers and certificates of the public
– Preserving, buying and selling securities on behalf of KHU
– Trading in foreign currencies, gold, silver and precious stones
– Financial consulting, helping companies and enterprises to issue stocks and bonds…
The three operational aspects of commercial banks are interrelated. Capital mobilization is the premise for service activities and capital use. Using capital safely, effectively and bringing high profits is the basis for banks to mobilize more capital. Service activities have the effect of attracting more customers and promoting images. Therefore, it supports a lot of capital mobilization and use. Implementing these three activities in a synchronous and effective manner is the key to the success of commercial banks in the market.
1.1.2 Lending activities of commercial banks
220.127.116.11 The concept of lending activities
Lending is a temporary transfer of an amount of value from the owner (TM) to the user (KH), after a certain period of time, it returns with a value greater than the original amount.
Lending is the most profitable activity but the highest risk of commercial banks. For banks to survive and develop firmly, lending activities must be safe and effective. To do so, it must be done according to certain principles. First, the borrower must ensure that the loan is used for the agreed purpose. This helps limit credit risk for banks. Second, the customer must ensure to repay the loan principal and interest on time as agreed in the contract. Third, the bank lends to projects that are feasible, effective and capable of repayment. Thanks to that, the new bank gets profit from lending.
Classification of lending activities
Loans are divided according to many different criteria.
According to the purpose of using the loan
• Loans for production and business purposes.
By the time
• Short-term loans: are loans with a term of up to 12 months.
• Medium-term loans: are loans with a term of more than 12 to 60 months. • Long-term loans: are loans with a term of over 60 months or more.
In the form of a guarantee
• Loans secured by assets
• Loans unsecured by property
According to the loan method
• Direct lending
• Indirect lending
According to the loan method
• Overdraft loans
• Direct loan each time
• Loan by limit
• Revolving loans
• Installment loan
The lending activities of commercial banks are of great significance to the economy. It has the effect of encouraging consumption, promoting production and business, creating a driving force for economic growth. Loans from banks are very important for the development of businesses, individuals and economic organizations, especially loans from banks promote consumption and make an important contribution to meeting consumer demand. of people. So what is the role of consumption and consumer demand in the economy? Why is the consumer lending activity of commercial banks so important? This will be presented in the next section.
1.2 Consumer lending activities of commercial banks
1.2.1 Concept of consumer lending activities of commercial banks
Consumer lending means the lending by the Lending Bank to the customer an amount of money as agreed with the principle of repayment of both principal and interest within a certain period of time to use for consumption, living and life service needs (1). In general, credit card is considered as a loan granted to individuals and households to spend for non-business purposes.
CVTD allows individuals and households to use before their ability to buy goods in the future, that is, to create conditions to satisfy consumption needs before they have the ability to pay. Therefore, in addition to improving living standards in terms of material, CVTD also indirectly stimulates production.
In Vietnam, consumer lending was born and developed much later than the world. Consumer lending activities have appeared since the early 90s of the 20th century. But it was not until 2000, when the economy in general and people’s lives in particular made clear and sharp changes. This type of credit really develops. In addition, consumer lending is also part of the bank’s strategy of diversifying credit types, expanding product and service portfolios as well as spreading risks. That helps the bank increase profits and promote the brand.
(1) Regulations on consumer lending in the banking system
Features of consumer loans
Consumer lending services of commercial banks can be one of the highest-cost services with the most risks because the financial situation of individuals and households is unstable and can change rapidly depending on the circumstances. according to their work or health status. Therefore, consumer loans are always managed closely and flexibly.
• Consumer loans are individuals and households. The loan needs of these people depend on their income and financial situation.
Therefore, it can be divided into 3 common cases:
Low-income individuals: credit demand is usually not high, it only appears to satisfy family needs to create a balance between income and expenditure.
Middle-income individuals: demand for consumer credit thrives because the desire to borrow to buy consumer goods is greater than their savings.
Individuals with high income levels: the need for consumer credit arises to increase their ability to pay or finance spending when their capital is already in an investment account.
• Size and quantity of consumer loans Credit loans are usually relatively small in size compared to business loans. Real estate loans may have a larger value, but the comparative value is still smaller than other loans at the Bank. The main reason is that customers only borrow for consumption when they have a relative amount of capital, only borrow from banks to supplement the missing amount.
However, the number of credit loans is very large because the subjects of this type of loan are all individuals in society with diverse consumer needs. As the economy develops, consumer demand increases, the number of consumer loans will increase.
• Loan term Credit loans are usually short and medium term due to the small value of the loan and high risk.
• Source of debt repayment The main source of repayment of consumer loans is the borrower’s income. Banks often consider the regular income of customers to make lending decisions.
• Consumer loan interest rate
Consumer loans have higher interest rates than loans in other sectors. The reason is that the size of the loan contract is small and it is more difficult to manage, so the bank’s lending costs are high. To offset this cost, of course, loan interest rates will be high. Besides, unlike most of today’s business loans with interest rates that vary according to market conditions, the interest rate for consumer loans is usually fixed at a certain level.
• Risks of consumer lending
The form of consumer lending contains a higher risk than financing production and business activities.
Objective risks: The main source of repayment of consumer loans is from the borrower’s current stable income, the customer’s ability to repay will be affected when the economy is in trouble, or occurs out these
general negative fluctuations such as natural disasters, crop failure, unemployment. The ability to repay consumer loans also depends on the health of the customer, especially when the borrower dies, it will be difficult for the bank to recover the debt.
In addition, CVTD is sensitive to business cycles. When the economy grows, people are optimistic about the future, the demand for bank loans is more, but when the economy is in recession, life becomes difficult, people will limit borrowing from banks.
Subjective risks: Financial information of individuals and households is often difficult to be complete and clear as information about enterprises (through annual financial statements, or audits of accounting work), leading to moral hazard and asymmetric information risk. Customers may not have goodwill to repay the bank despite their ability to pay, or provide incomplete and truthful information to achieve loan purposes.
• Consumer lending expense CVTD is one of the most expensive items in the bank’s loan portfolio. Due to the large number of loans,
With large customers but small scale, the bank has to mobilize a lot of human resources, from receiving documents, appraising, lending decisions, disbursing, controlling and collecting debts. The management of credit card accounts with a large amount also incurs many costs.
• Profits from consumer loans
Currently, the profit level from consumer loans of commercial banks is quite high, accounting for a large proportion of the total profit of banks.
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