Based on the Secured Nature of the Loans

Credit capital is mainly in currency, but can also be assets. This capital is mainly formed from mobilized deposits, or can issue certificates, valuable papers to create money for lending...

Loan terms are very flexible, can be short-term, medium-term, long-term. Bank credit instruments are also very flexible, can be promissory notes, bank bonds, credit contracts...

This is an indirect form of credit, in which the bank is a credit intermediary between savers and those who need capital for production, business or consumption, thereby earning profits.

1.2.2 Functions of bank credit

Maybe you are interested!

Resource redistribution function: Credit is the transfer of capital from one subject to another. Through this transfer, credit contributes to the redistribution of resources, showing:

The lender has some temporarily unused resources, through credit, those resources are redistributed to the borrower.

Conversely, the borrower also receives a portion of the redistributed resources through the credit relationship.

Function of promoting the circulation of goods and development of production: Thanks to credit, the process of capital circulation in each unit in particular and in the whole economy in general is carried out normally and continuously. Therefore, credit contributes to promoting the development of production and circulation of goods.

1.2.3 Classification of bank credit

1.2.3.1 Based on credit term

Short-term credit : is a type of credit with a term of less than one year, often used for payment transactions, lending to supplement temporary shortages of working capital of businesses or individuals.

Medium-term credit : has a term of 1 to 5 years, used to lend capital to serve the needs of purchasing fixed assets, improving technical innovation, expanding and constructing small projects with quick capital recovery period.

Long-term credit : is a type of credit with a term of over 5 years, used to provide capital for basic construction, improvement and large-scale production expansion.

1.2.3.2 Based on the purpose of using the loan

Production and circulation credit : is a type of credit provided to businesses to conduct production and business.

Consumer credit : is a type of credit granted to individuals to meet consumer needs. This type of credit is often used to buy houses, vehicles, household appliances... Consumer credit is on the rise.

1.2.3.3 Based on customer target

Credit for corporate customers; Credit for financial institutions; Credit for individual customers.

1.2.3.4 Based on the secured nature of the loans

Secured credit : is a type of credit in which loans issued have assets equivalent to mortgages, in forms such as: pledge, mortgage, discount and guarantee.

Unsecured credit : is a type of credit in which loans are issued without collateral but only based on credit. This type is often applied to traditional customers who have a long-term and fair relationship with the bank. This customer must have a healthy financial situation and be reputable with the bank such as paying off debt in full and on time, both principal and interest, having a feasible production and business project, and having the ability to repay debt...

In a market economy, classifying bank credit according to the above criteria is only relatively meaningful. The more diverse the forms of credit, the more detailed the classification.

1.3 Loans to individual customers of commercial banks

1.3.1 Concept and characteristics of personal loans

Concept : Lending to individual customers is a type of bank credit as presented above. This is a form of bank financing for individual customers: "It is an economic relationship in which the bank

transfer to individuals the right to use a sum of money under certain conditions agreed in the contract for the purpose of science and technology.”

Characteristics of personal loans : Personal loans have their own characteristics that show the difference from other types of loans as follows:

Loan objects are individuals, households and businesses.

Loan size : most of the loans for science and technology are small in scale but the number of loans is large, because science and technology loans meet the needs of individuals and households for consumption or small business production purposes, so the size of a loan is relatively small compared to the assets of the bank, the number of loans is very large because the loan subjects are individuals and households with large numbers and very diverse consumption needs.

Loan purpose: to serve the consumption or small business production needs of individuals and households.

Risks and costs of lending to individual customers: lending to individual customers has a high level of risk and is considered the riskiest asset in the bank's asset portfolio. In addition, to obtain loans, many customers hide information about their health and future employment, so banks are prone to moral hazard when lending. Because lending to individual customers has the highest risk, banks often require collateral when borrowing. In addition to the high risk, lending to individual customers also has high costs due to the small size of each loan and small loan amount; while the large number of loans makes administrative and credit management costs high.

Lending interest rates : due to high risks and costs, science and technology loans have to bear high interest rates. Until now, science and technology loans have been considered by banks as a profitable item with quite high interest rates. With science and technology loans, banks have to bear interest rate risks when capital mobilization costs increase. However, these loans are often priced so high that the market interest rates and credit loss ratios must increase significantly for most science and technology loans to be unprofitable.

Personal loan limit: is the maximum amount that the bank lends to customers, the personal loan limit is determined based on factors such as: customer's capital needs, customer's own capital, value of collateral. For different types of loans, banks often set different limits based on the value of collateral or reasonable loan needs. In order to determine the credit limit based on the customer's collateral, banks need to accurately value that asset. Finally, the bank will compare the reasonable loan needs and the credit limit, thereby determining the loan amount.

1.3.2 The role of personal loans

1.3.2.1 For commercial banks

Credit plays an important role in increasing the bank's profits through lending activities. For loans from own capital, the bank earns profits based on the interest rate of each loan, for loans from mobilized capital, the bank earns profits from the difference in interest rates between deposit interest rates and lending interest rates. Along with the corporate credit segment, personal credit plays a very important role because personal credit products are rich and diverse, a market full of potential.

Credit activities in general and personal credit in particular play an important role in the process of creating money for banks, also known as currency pens. Thanks to this method, banks can expand lending and thereby expand bank money sources many times over.

The KHCN subjects are not only subjects with capital needs. These subjects are also a force that provides banks with a relatively large and stable amount of capital. This source of capital is mainly personal savings, so its stability is very high, creating favorable conditions for investment in medium and long-term assets of banks. Building good relationships with this group of customers, commercial banks can both access loans and have savings formed from this group of customers.

1.3.2.2 For the economy

Science and technology credit plays a very important role in the development of the economy. Its new development helps businesses consume inventory goods, boldly borrow capital for production and business, contributing to economic growth. Therefore, this is a credit sector that needs attention at the present time.

1.3.2.3 For individual borrowers

Personal credit activities not only bring benefits to commercial banks but also contribute positively to improving people's lives. Banks often provide small loans to individuals, although the loan amount is not large, but it is enough to cover expenses, small investments, short-term consumption or supplement medium and long-term business capital for individuals, business households and businesses. If you are not a large investor of billions to tens of billions, this form of loan is what you need.

1.3.3 Basis for forming personal customer lending activities.

Borrowing activities in the economy originate from economic relations where payment is not possible or difficult to be done immediately. Therefore, through trust and mutual understanding, credit activities were born.

Especially in the context of increasingly developing economy, human life is increasingly improved, the consumption needs of each individual in particular and the consumption of the whole society in general will be increasingly expanded in both scale and quality. Individuals tend to consume to improve their living standards, satisfy their needs as well as their goals and plans. However, individuals do not always have enough financial capacity to pay for those consumption needs at the time of need. From here, the need to borrow money of this group of individuals is formed, and lending activities for science and technology are also born to solve that need.

1.3.4 Distinguishing between lending to individuals and lending to organizations and businesses

The reason why commercial banks distinguish lenders into these two groups is because the characteristics of the two groups are different, but this distinction is only at a relative level. And this distinction aims to improve the quality of management of bank loans, limiting risks for banks.

The group of enterprises and organizations often have large loan needs, the loan terms are often short and highly stable. Because the loans are large, each loan often requires the bank to evaluate very carefully, the evaluation and analysis process is extremely strict because if credit risks occur, the consequences will be very serious, deeply affecting the bank's operating results.

For SMEs: Loans for SMEs are usually small, irregular and stable loans. These loans are usually formed from the immediate spending needs of individuals, so meeting the immediate needs of the group of SMEs is the goal that commercial banks must aim for. Lending to SMEs also helps commercial banks to disperse credit risks through lending many loans to many customers. The subjects are classified into this group not based on the value of large or small loans but based on the legal status of the borrower before the law. In this credit relationship, the bank and the borrower have a direct relationship with each other. As for lending to organizations and businesses, the person applying for a loan is the representative of that organization, this individual has the status of an organization, not an individual.

1.3.5 Lending process for individual customers of commercial banks

Lending procedures are the procedures that have been predetermined by the bank that credit officers must apply to resolve a loan need in order to help the lending process take place scientifically, prevent risks and improve credit quality. The lending process is usually divided into 6 steps:

Step 1: Receive loan applications from individual customers:

When customers need a loan, they go to the bank staff and fill in the necessary information in the loan application. The credit officer will guide them.

Customers prepare a complete and correct loan application according to the bank's form, including: loan application, loan plan and repayment plan, list of mortgaged assets and related documents, documents proving source of income (if any), household registration, identity card and other related documents.

Step 2: Credit appraisal.

This is the most important step in the KHCN lending process, determining the quality of the loan, usually including the following contents:

Assessing the moral character and purpose of the loan of the customer: the credit officer must ensure that the borrower has full legal capacity and civil capacity, and is legally qualified to borrow from the bank. If a customer wants to borrow from the bank, they must fully answer the questions of the credit officer about the reason for the loan application or where the credit need comes from. The conversation between the credit officer and the customer is very important because through it the credit officer can recognize the character as well as the purpose of the loan application of the customer. If the credit officer discovers the dishonesty of the customer, the customer's loan application can be rejected.

Typically, the borrower’s basic characteristics are revealed through the purpose of the loan. The loan officer must ask what the customer intends to use the loan for and whether that purpose is consistent with the bank’s lending policy.

Assessing the financial situation and ability to repay the debt of customers: Including the following tasks: determining the customer's income level, employment, and balance of deposit accounts at the bank. Credit officers must ensure that customers who borrow money are clearly aware of their responsibility to repay their debts in full and on time. Determining the customer's stable monthly income is very important because this is the source of repayment for the bank. Customers with stable income and high remaining income after deducting necessary living expenses will have a high ability to borrow.

Step 3: Appraisal of collateral

Credit officers need to check the ownership or legal use of the assets used as collateral of the customer. The ability to convert the assets into cash in case of need and the stability of the price of the assets. Valuation of collateral assets is also a very important step in the appraisal process. Finally, the bank needs to consider the ability of the borrower to preserve the assets.

After the assessment is completed, the credit officer will prepare an assessment report that briefly but generally states the customer's situation: name, age, loan purpose, loan amount, repayment plan, collateral, and gives an opinion on whether to grant or not to grant the loan to the customer. If the loan is granted, the amount, term, interest rate, repayment plan, and accompanying conditions must be clearly stated and submitted to the credit department manager for consideration. If the loan is not granted, the reason must be clearly stated.

Step 4: Review and sign credit contract .

After receiving the appraisal report with the relevant loan application, the credit manager will review it and request the credit officer to explain, supplement or edit if there are any shortcomings. The report will then be submitted to the competent authority for approval and decision to grant or deny the loan. If necessary, the competent authority may request another department to re-appraise the loan application. Then, when the loan application is approved, the credit officer will meet directly with the customer to sign the credit contract.

A credit contract is a written document with the main content being that the bank commits to providing the customer with a credit amount (credit limit) for a certain period of time and interest rate. The main content of the credit contract includes: purpose of loan use, scale, interest rate, credit term, fees, types of guarantees, payment terms, other conditions, etc.

Step 5: Disbursement and control during credit granting.

The credit contract has been signed and approved by the competent authority, the bank will disburse to the customer the amount corresponding to the amount signed in the contract.

Comment