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Completing project lending activities of the Petroleum Finance Company (PVFC) - 2

CHAPTER I:‌‌

SOME BASIC ISSUES ON PROJECT LENDING ACTIVITIES OF FINANCE COMPANIES


1.1. Overview of financial companies

1.1.1.Concept of finance company

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Banking and financial markets have been around for a long time and are increasingly becoming one of the areas of special interest to the people and society, because they have contributed to creating great progress and are decisive in the history of human civilization through promoting trade and economic development. Promoting the development of financial institutions is a necessary and urgent task . Although banks are the financial institutions that we most often deal with, not all financial institutions are just banks. Suppose you buy insurance from an insurance company, take out a loan from a finance company to buy a new car, or buy some stocks with the help of a broker, in each of these transactions you are dealing with a non-bank financial institution.

In the early 20th century, non-bank financial institutions were formed on the basis of specialization of some banking activities to overcome the limitations of commercial banks, and to diversify financial institutions in the market economy. In our economy, non-bank financial institutions play an important role in mobilizing capital from lenders - savers to borrowers - spenders like a bank. In particular, the process of financial innovation in Vietnam has increased the importance of non-bank financial institutions, specifically in the "Socio-economic Development Strategy in Vietnam for the period 2001-2010" affirmed: " Creating a healthy and open financial environment to liberate and develop

Completing project lending activities of the Petroleum Finance Company (PVFC) - 2

financial resources and production potential of enterprises and social classes; fostering and expanding budget revenue sources, attracting external capital sources; diversifying tools and forms of non-bank financial and monetary organizations and investment funds to mobilize resources for economic and social development. Through innovation, non-bank financial organizations compete more directly with banks through services similar to banking activities. Non-bank financial organizations operate under the following types of organizations: Finance companies; Financial leasing companies; Investment funds; Government and local financial organizations; Insurance; Securities companies ... Among these non-bank credit organizations, there is a very important component, which is finance companies.

To understand more about financial companies, we need to understand more about the concept of non-bank credit institutions. Currently, there are many different views on non-bank credit institutions in the world, stemming from differences in the legal environment and financial instruments in different countries. In Vietnam, this concept is introduced in the Law on Credit Institutions No. 07/1997/QHX, Article 20 of this Law clearly states: “ Non-bank credit institutions are a type of credit institution that is allowed to perform some banking activities as a regular business activity, but is not allowed to receive demand deposits or provide payment services. Non-bank credit institutions include finance companies, financial leasing companies and other non-bank credit institutions”.

Thus, according to the concept of non-bank credit institutions, a finance company is one of the types of non-bank credit institutions. According to Article 2 of Decree 79/2002/ND-CP of the Government on the organization and operation of finance companies, a finance company is defined as: “ A type of non-bank credit institution, with the function of using its own capital, mobilized capital and other sources of capital to lend, invest, provide financial and monetary consulting services and perform a number of other services as prescribed by law.

law, but not allowed to provide payment services, not allowed to receive deposits under 1 year ."

In developed countries, financial companies have developed very rapidly. In the last two decades, these companies have expanded and taken control (directly or indirectly) of many banks or credit institutions. Their activities cover the activities of commercial banks to hold and control the activities of economic sectors.

Over the years, finance companies in Vietnam have undergone significant changes in terms of capital sources and capital usage in the industry. In addition, finance companies today also face increased competition from commercial banks, credit institutions, savings and loan associations and other lending institutions. Due to price pressures and competition, finance companies have had to diversify their operations to penetrate both the consumer and business lending markets at the same time.

Thus, finance companies are similar to other financial intermediaries that operate in a special field, the field of monetary finance. Like commercial banks, finance companies also act as intermediaries in the process of transferring capital from those with unused capital to those in need of capital, acting as a channel for capital in the economy. However, finance companies (CTTC) also have important differences compared to commercial banks (NHTM). Specifically:

Organizational aspects:

Finance companies are specialized business organizations in the financial market, with independent accounting, registered under the law. They are usually small or medium in size and do not have many branches like commercial banks.


In terms of operations :

Unlike commercial banks that perform all three stages: receiving deposits, lending and payment, the operations of financial companies are narrower, limited to a number of stages and specialized in certain operations.

Financial companies raise capital by accepting deposits, issuing stocks and bonds, and using the proceeds to make loans. The loans are usually small loans, meeting the needs of businesses and consumers. The financial intermediation process of financial companies can be described as they borrow large amounts of money and lend small loans. This is a completely different process from commercial banks, which usually mobilize small deposits and then lend much larger amounts.

Unlike commercial banks, financial companies are not allowed to mobilize short-term deposits of less than one year. This has been clearly stipulated in legal documents on financial companies. Not being allowed to mobilize deposits with terms of less than one year like commercial banks has greatly limited the activities of financial companies. The customers of financial companies cannot be individual customers with small savings, but only large individuals or organizations with abundant capital and long-term lending needs. This limitation in capital mobilization has caused financial companies to lose a significant amount of mobilized capital for lending.

Financial companies are not free to perform payment operations like commercial banks. Banks were born with the basic function of performing money creation, custody and payment services. Banks can only create a much larger amount of money than the original amount by performing a combination of these operations.

Financial companies are not subject to strict control by the State Bank like commercial banks. The system of commercial banks is subject to the control of agencies such as the Ministry of Finance and the State Bank on both borrowing and lending activities. Most banking activities must be approved by the Governor of the State Bank to be implemented. On the contrary, financial companies are usually only oriented to operate in accordance with the law, while specific operations and implementation are often proposed by the company itself and approved by the General Corporation or Group. Therefore, the activities of financial companies become much more flexible.

Nowadays, with the strong economic development and integration in each country, financial companies often have the need to expand the scope and scale of operations, so financial companies all want to expand and diversify their business operations to serve the needs of a wide range of customers as well as to maximize profits. Therefore, the difference between financial companies as well as other non-bank credit institutions and commercial banks is gradually fading away and moving towards no big difference.

1.1.2. Classification of financial companies

From many different perspectives, financial companies can be divided into different types.

Based on ownership structure , according to Article 3 of Decree 79/2002/ND-CP, Finance companies are divided into five types:

- State finance company: Is a finance company invested in, established and organized by the State to manage business activities.

- Joint stock finance company: Is a finance company in which organizations and individuals contribute capital according to the provisions of law, established in the form of a joint stock company.

- Finance company under a credit institution: Is a finance company established by a credit institution with its own capital and owned in accordance with the provisions of law, with independent accounting and legal status.

- Joint venture finance company: Is a finance company established with capital contributions between one or more domestic and foreign credit institutions and enterprises, including one or more foreign credit institutions, on the basis of a joint venture contract.

- 100% foreign-owned finance company: Is a type of finance company established with capital from one or more foreign credit institutions in accordance with domestic law.

Based on independence in operation , financial companies are divided into 2 types:

- Independent finance companies carry out business activities such as: Credit activities including lending and guarantees for commercial and industrial customers; asset leasing activities; factoring; currency trading; financial consulting, etc.

- Financial companies in the business group mainly participate in the following activities: Searching for investment capital sources to supply to members in the group; managing and investing unused capital sources in the group; managing temporarily idle funds, regulating capital among members; acting as a consulting focal point for the group; member companies in relations with banks; investment partners; managing and applying financial risk prevention measures; providing financial consulting services to external customers...

Based on business activities , finance companies are divided into 3 types:

- Sales Finance Companies: Owned by manufacturing and sales companies and make loans to finance customers' purchases.

The company's own products and services. For example, retail chain Sears Holdings Corp. finances the purchases of goods and services at its chain of retail stores. Sales finance companies compete directly with banks for consumer loans and attract many customers because these loans are often faster and more convenient at the point of purchase.

- Consumer Finance Companies: Make loans to customers to buy specific types of goods. For example: Furniture and household items, home repairs or help with small debt payments. Consumer Finance Companies are separate businesses or owned by banks such as: Citicorp, Owns person-to-person, Finance company operating in countries around the world.

- Corporate finance companies: Provide specialized forms of credit to businesses by purchasing discounted receivables (payment invoices belong to the finance company). This form of credit provision is called factoring. Consider a specific example as follows: a garment factory has unpaid invoices from retail stores that have purchased goods from the factory for $100,000. If this factory needs immediate cash to buy equipment, they can sell this payment account to the Finance Company for $90,000 and give the right to collect the $100,000 debt to the Finance Company. In addition to factoring, corporate finance companies also specialize in leasing equipment and machinery (cars, trucks, freight cars, airplanes, ships, computers, etc.) that they purchase and lend to businesses for a certain period of time. Providing credit in this form is called leasing.

1.1.3. Main activities of finance companies

The activities of financial companies are very diverse and rich in different countries as well as in different markets. In general, financial companies operate mainly in the following areas:

Capital mobilization activities :

The first step of this activity was that financial institutions kept money for customers and customers had to pay fees, but today people see the role of that capital source so they actively mobilize it and let customers enjoy interest depending on the interest rate, deposit term and deposit amount.

Capital mobilization is the initial activity of other activities at a finance company. A finance company is essentially a financial intermediary that operates primarily without equity capital, so in order to operate and provide capital to the economy, in addition to equity capital, a finance company must mobilize temporarily idle capital sources in the economy through the following activities:

Receive term deposits from member units, businesses in the same industry, and individual organizations.

Issuance of bonds and debt certificates:

- Issuing bonds: In addition to the initial charter capital upon establishment, a finance company can mobilize additional capital from society through the issuance of bonds. During its operation, the charter capital can be supplemented and gradually increased through the mobilization of capital contributions from the group or the issuance of additional bonds.

- Issuing debt certificates: Is a debt certificate issued by a finance company to borrow capital in the money market to solve urgent short-term cash and capital needs.

Borrowing from domestic and foreign credit institutions:

Finance companies can borrow from commercial banks and other financial intermediaries, but cannot borrow from state banks.

Receive investment trust:

Financial companies can receive investment trusts from domestic and foreign organizations and individuals with long-term investment needs. Investment trust capital

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