Completing the appraisal of loans for additional working capital for corporate customers at Vietnam Joint Stock Commercial Bank for Industry and Trade - Dong Anh Branch

Step 1: Receive and check loan applications from customers

CBTD will be the person who contacts customers to borrow capital, receives loan documents from customers and conducts checks. For customers who are new to the bank for the first time, CBTD will guide customers specifically on the necessary documents to be able to borrow capital from the bank. Types of loan documents include: Customer profile, Loan profile and Loan guarantee profile. For customers who already have a credit relationship with the bank, CBTD will guide customers to prepare loan profile, loan guarantee profile and additional information of the customer profile (if any).

After receiving all documents from the customer, the CBTD will proceed to check the loan application. The CBTD needs to check the completeness, authenticity, legality and validity of the loan application through notarized documents, papers, decisions, invoices for goods purchase and sale with red stamps of the tax authority, of the partner, confirmation of the local government where the business operates compared to the regulations of the bank. Then, the CBTD will report to the customer department leader about the status of the application. If the customer's application is incomplete, the CBTD will request the customer to supplement the application, receive and check the additional documents and papers until the customer's application is complete and in accordance with regulations (in case the customer is missing some unimportant documents and papers, they can be supplemented later). If the customer's application is not accurate, legal or valid, the customer will be required to modify, supplement the application or reject the customer's application.

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Once all necessary documents are available, CBTD will proceed to appraise the customer's loan application.

Step 2: Assess loan conditions

Based on the documents provided by the customer, information collected during the on-site inspection at the unit and information from other sources, the CBTD will conduct an appraisal of the borrowing customer, the customer's financial situation, the customer's business plan, debt repayment ability and the loan collateral.

Appraisal of loan customers: CBTD will conduct an examination of the civil legal capacity, civil conduct capacity, capacity, professional qualifications and reputation of the loan customer and the loan representative. Appraisal of the organization and operation of the borrowing enterprise, the type of customer, and the relationship of the customer with other non-bank credit institutions. The purpose of appraising loan customers is to ensure the legal status of the borrower, the basis for the bank to determine the scope of responsibility and obligation to repay the principal and interest to the bank.

Assessing the customer's financial situation: By analyzing the customer's financial indicators, CBTD assesses whether the customer has a healthy financial situation.

sufficient to ensure the ability to repay the bank if the bank lends capital to customers or not. CBTD assesses the transparency of the enterprise's financial data, the performance of the inspection, control, and internal audit apparatus, assesses the enterprise's assets, equity, and the level of satisfaction with the conditions for granting credit limits. Assesses financial indicators such as: asset status, capital sources, ability to repay loans, profitability, solvency, and growth indicators to consider the enterprise's autonomy, ability to repay bank loans, and operational efficiency.

Appraisal of the business plan: Appraisal of the feasibility and effectiveness of the business plan to assess the ability to recover debt from the business results of the business plan. The effectiveness of the business plan is reflected in sales revenue. Consider the suitability of the business plan with the business lines in the business registration certificate, investment certificate, and the suitability of the loan demand with the provisions of law.

Assessing the business's ability to repay: The condition for customers to be able to borrow capital is to have a healthy financial situation, that is, the business is financially independent and fully capable of repaying the debt. The customer's ability to repay the debt depends largely on the results of the production and business plan. Assessing the customer's ability to repay the debt is based on the situation of assets, capital sources, and revenue from the production and business plan.

Loan security assessment: This assessment is only carried out in cases where the lending bank has secured loans with assets (including assets formed from loan capital). The CBTD will check the documents related to the loan collateral to assess the legality of the assets and re-evaluate the assets, assessing the liquidity of the collateral on the market. For loans without asset security, the bank relies on the reputation of the borrower to make a lending decision, the CBTD needs to assess the reputation of the borrower. The customer's reputation is assessed through the customer's previous loan contracts at the bank, through the customer's timely repayment of principal and interest.

Step 3: Independent credit risk assessment and risk reporting

After CBTD has conducted a preliminary assessment of the customer's loan conditions, the risk management department staff will receive the application and proceed to assess the risk level of the project. The risk management staff will study the application, assess the credit risk, detect signs of risk, assess the credit risk level and propose measures to minimize credit risk. After completion, the risk management staff will prepare a risk report and submit it to the Risk Management Department leader.

Step 4: Prepare appraisal report

CBTD relies on analyzed data to draw conclusions about the bank's ability to recover debt and profits when lending to customers. If it is considered possible,

If the bank is able to lend to customers, the CBTD will establish a credit limit, propose a loan limit and credit limit, report the results of the appraisal work for the customer and submit it to the superior for approval, and proceed to provide capital to the customer. If the customer is not eligible for a loan, the CBTD will establish a credit limit and propose to refuse to provide credit to the customer. The CBTD will have to explain the reason for refusing to provide credit to the customer to the leader and the customer.

1.3.7 Appraisal method

1.3.7.1 On-site assessment

On-site appraisal is when the CBTD directly goes to the customer's production and business location to conduct inspection and appraisal. At the business premises of the enterprise, the CBTD will review and conduct a preliminary assessment of the information that the customer has provided to the bank in the loan application. This job requires the CBTD to be quick, have experience in the customer's business field, as well as be skillful in contacting with staff and workers to find out the remaining weaknesses within the enterprise. The CBTD can check the inventory, business size, estimated number of employees, production process, etc.

On-site appraisal is also important when the loan application includes collateral. The CBTD will verify the reality of the collateral, that is, the collateral is owned by the enterprise, is used to serve the enterprise's production and business activities and is real. Through that, the revaluation price of the collateral can be assessed as close to the market value as possible.

On-site assessment is necessary for CBTD as well as banks to make correct assessments about customers that remote assessment cannot show, helping banks make more accurate decisions and minimize unwanted risks.

1.3.7.2 Remote assessment

Remote appraisal is when CBTD relies on the customer's profile submitted to the bank to conduct appraisal.

CBTD relies on the minutes of shareholders' meetings, minutes of election of chief accountant, director, deputy director, chief accountant, business registration certificate... in the customer's legal file to certify the customer's civil legal capacity. These minutes and documents must be notarized by the State notary office at the location of the business's operations. CBTD must carefully review this content to make initial assessments of the honesty and legality of the documents the customer submits to the bank, and assess the honesty of the loan collateral.

The loan application also includes financial reports, business performance reports, and the customer's business plan. The bank evaluates by calculating the indicators.

basic and important indicators such as liquidity, stability, growth, operational efficiency, profitability, debt balance to make an assessment of the customer's financial situation. At the same time, the bank must also assess the feasibility and effectiveness of the business production plan, the bank's estimated profit when lending, and the customer's ability to repay the debt.

Remote appraisal is conducted as soon as CBTD receives the loan application from the customer, helping the bank have an initial assessment of the loan customer.

1.3.8 Appraisal content

1.3.8.1 Non-financial appraisal

Assessing the civil legal capacity of customers: Based on the documents provided by the customer, the CBTD is responsible for finding out the customer's status such as whether they have full civil capacity, civil conduct capacity, legal capacity or not, whether the business is established and operates in accordance with regulations or not, whether the legal representative is competent or not... and comparing with the provisions of current law to consider whether the customer is qualified to do business and borrow capital or not.

Assessing the customer's ability and experience in organizing, managing and operating: The bank assesses the professional experience of the executive head, the experience of the executive head, the internal control environment, the executive capacity of the head directly managing the business... to assess the customer's ability in managing and operating the business. Based on the feasibility of the production and business plan and financial projections to see if the customer's proposal is specific and clear, thereby knowing the level of the business's leadership.

Customer credit assessment: Customer credit is also one of the conditions that banks consider when lending capital to customers. Through credit information centers, partners, and suppliers that have relationships with customers, banks can know the customer's debt repayment status, the customer's credit utilization level, etc. to set appropriate loan terms and loan levels for customers. In addition, through this, banks can assess the customer's creditworthiness and willingness to repay.

Appraisal of customer's credit relationship with other credit institutions: Based on the appraisal of customer's credit relationship with other non-bank credit institutions, the bank has initial assessments of customer's financial situation and debt repayment situation.

1.3.8.2 Financial appraisal

(1) Financial analysis

Customers with healthy financial potential are an important basis to ensure autonomy in business operations, ensure competitiveness in the market and

ensure the ability to repay future debts. This is the most important basis for banks to consider whether to lend money to customers or not, how much the loan is, how long the loan is, and what the interest rate is.

Therefore, the financial assessment of customers must be considered very carefully, through many analytical and systematic indicators. The review period is usually two consecutive years (except for newly established customers) to draw conclusions about whether the customer's financial situation is healthy or not. The indicators commonly used to analyze the customer's financial situation:

(1.1) Group of coefficients on payment capacity:

Whether a customer is able to pay or not is not only a reflection of financial ability but also of ability to pay. This is a very important indicator for banks when considering lending to customers, it tells us the customer's ability to repay debts due.

Short-term solvency =

Current Asset Value

Current Liability

This ratio indicates whether the customer has enough short-term assets to ensure short-term debt repayment. If the ratio is 1 or higher, the customer's payment ability is guaranteed, the customer has full capacity and short-term assets to repay short-term debt. If this ratio is less than 1, there is a sign of lack of payment ability, the customer does not have enough ability to fulfill short-term debt repayment obligations with short-term assets. When this ratio is less than 1, CBTD needs to investigate the cause in order to assess the customer's future payment ability if the bank continues to lend to the customer.

Current Asset Value – Inventory Value

Quick Payability =

Current Liability

Quick ratio is the ability of a business to pay its debts without taking into account the value of its inventory. A ratio greater than or equal to 1 is good, indicating that the business has the ability to pay its short-term debts with cash, cash equivalents, and short-term receivables from customers. If the ratio is less than 1, the business does not have the ability to pay its debts when they come due with quick, highly liquid funds.

(1.2) Group of performance indicators:

This group of ratios reflects the ability to utilize resources to generate revenue and the process of converting revenue into cash. The ratios reflect:

Cost of goods sold

Inventory turnover =

27 Average inventory value

This ratio shows the fast or slow turnover of inventory. The limit of this ratio depends on each field of operation of the borrower. The higher the inventory turnover ratio, the faster the business sells and the inventory is not stagnant. However, this ratio is not good either, because it means that the amount of inventory in the warehouse is not much, if market demand increases suddenly, the business is likely to lose customers and have its market share taken by competitors. Moreover, insufficient reserves of input materials for production stages can cause the production line to stagnate. On the contrary, if the turnover is slow, there may be a backlog of goods, making financial difficulties in the future. Therefore, the inventory turnover ratio must be large enough to ensure production levels and meet customer needs.

Accounts receivable turnover =

Sales on credit

Average receivables

This ratio reflects that if the turnover is fast, it shows that the customer manages the receivables well, the debt collection speed of the enterprise is fast. On the contrary, if the turnover is slow, it shows that the receivables management is weak, and a lot of capital is occupied. However, if the ratio is too high, it may be due to the customer's sales mechanism being too strict, the enterprise rarely sells on credit or the deferred payment policy is not flexible. This affects the commercial relationship with the customer in the deferred payment - credit purchase, the revenue will be reduced and will not create competition with competitors.

Average collection period =

360 days

Receivables Turnover

This indicator reflects the operating cycle of the enterprise, indicating how many days it takes the enterprise to collect its receivables. When lending, banks will rely on this indicator to determine the loan term and specific repayment terms. Because the working capital of the enterprise participates in a production and business cycle, and is collected when the enterprise receives money from sales activities, the average debt collection period is the basis for the bank to decide the loan term and the time for lending to the enterprise.

The shorter the business cycle of an enterprise, the better the enterprise uses capital, does not keep inventory and has a high reputation. The average business cycle of a trading enterprise is usually less than 3 months, a manufacturing enterprise is from 6 to 9 months, a construction enterprise is from 9 to 12 months. In case the business cycle of a customer is longer than average, the cause must be found out, reflecting the characteristics of the customer and must be proactive.

Accounts payable turnover =

Total amount of goods purchased on credit

Average accounts payable

This indicator reflects the reasonableness of the balance of payables and the ability of the enterprise to pay debts. The amount of goods purchased on credit from partners can be occupied for a short time and does not have to pay interest. However, if the enterprise has a large credit purchase or a long repayment period, and has to urge debt collection for a long time, then the enterprise's reputation will decrease and the enterprise's financial situation needs to be reviewed.

Net revenue

Working capital turnover =

Average current assets value

This is the indicator that CBTD is most interested in when assessing loans for additional working capital. The higher the turnover, the more effective the business plan is, the less working capital the business uses for production and business but still has high revenue. Based on this indicator, CBTD will calculate the amount of capital to lend to customers, avoiding lending too much leading to capital waste.

(1.3) Group of indicators on profitability:

Analyze customer profitability to determine the effectiveness of the business in reaching the market. The indicators used for analysis include:

Profit after tax

Net profit margin to total assets (ROA) =

Total assets

This ratio measures profitability relative to total assets, indicating how much net profit after tax each dollar of a company's assets generates each fiscal year. The higher this ratio, the better the business operates, generating high profits on total invested assets, and having the potential to grow strongly in the future.

Profit after tax

Net profit margin to equity =

Equity

This ratio shows how much profit after tax is generated for each dong of equity capital invested by the enterprise. This index also shows the efficiency of the enterprise's capital use, the profitability of capital and the reduction of costs to increase profits because there are many enterprises whose total revenue increases rapidly but profits increase very little or do not increase, at that time it is necessary to find out and analyze the causes of the above phenomenon.

(1.4) Financial leverage ratio group:

Financial leverage ratio, also known as debt ratio, is a ratio that measures the extent to which a company uses debt to finance its operations.

Debt to equity ratio =

Total value of liabilities

Equity

This ratio shows how much debt is financed by each dong of equity of the enterprise. If this ratio is from 0 to less than 1, it means that the enterprise can pay its debt with equity. When this ratio is 1, each dong of equity of the enterprise is financed by 1 dong of debt. If this ratio is greater than 1, it means that the enterprise is unable to pay off all of its debt with equity. Thus, if there is a risk, the bank will lend to the enterprise, the bank will have to bear the risk, the risk of high loss.

Debt to total assets ratio

= Total value of liabilities

Total assets

This ratio shows how many dong of assets are financed by 1 dong of debt. If this ratio is low, the enterprise is financially independent and can ensure the ability to repay the bank. If this ratio is too high and closer to 1, the enterprise is likely to fall into a state of insolvency, and the bank is very likely to face risks when lending to the enterprise.

Based on the analysis indicators, the bank can assess the level of risk in lending to customers. Customers with high financial leverage have high risk, the bank can refuse to lend or accept the customer's risk, lending at a higher interest rate.

Self-funding coefficient =

Equity

Total capital

Owner's equity is the capital owned by the enterprise, so a high ratio is good, the enterprise has a large capital to serve production and business activities. Banks lend to customers with a high ratio because of higher safety. If the enterprise has a low ratio but the bank still wants to lend, it will require a higher interest rate due to the higher risk level.

(1.5) Group of coefficients on the ability to repay interest:

Earnings before interest and tax

Interest Coverage Ratio =

Interest expense