Concept of Financial Capacity of Commercial Banks

bank cards, letters of credit and other payment services to customers through customer accounts.

Specifically:

+ Lending is a form of credit, in which the lender delivers or commits to deliver to the customer a sum of money to be used for a specific purpose within a certain period of time as agreed upon with the principle of repayment of both principal and interest.

+ Factoring is a form of credit provision for sellers or buyers through the repurchase with recourse of receivables or payables arising from the purchase and sale of goods and provision of services under contracts for the purchase and sale of goods and provision of services.

+ Bank guarantee is a form of credit granting, under which the credit institution commits to the guarantee recipient that the credit institution will perform financial obligations on behalf of the customer when the customer fails to perform or does not fully perform the committed obligations; the customer must accept the debt and repay the credit institution according to the agreement.

+ Discounting is the purchase with a term or purchase with recourse of negotiable instruments and other valuable papers of the beneficiary before the payment due date.

+ Rediscounting is the discounting of negotiable instruments and other valuable papers that have been discounted before their maturity.

+ Currency brokerage is the act of intermediary with brokerage fees to arrange the implementation of banking activities and other business activities between credit institutions and other financial institutions.

+ A payment account is a customer's non-term deposit account opened at a bank to use payment services provided by the bank.

+ A derivative product is a financial instrument priced according to the expected change in the value of an underlying financial asset such as exchange rate, interest rate, foreign exchange, currency or other financial asset.

+ Capital contribution and share purchase of a credit institution is the act of a credit institution contributing capital to form charter capital, purchasing shares of other enterprises and credit institutions, including providing capital and contributing capital to subsidiaries and affiliated companies of the credit institution;

Contribute capital to investment funds and entrust capital to other organizations to contribute capital and buy shares in the above forms.

Investment in the form of capital contribution or share purchase to gain control of an enterprise includes an investment accounting for more than 50% of the charter capital or voting shares of an enterprise or other investment sufficient to influence the decisions of the General Meeting of Shareholders or the Board of Members.

Although banking activities are diverse and rich, banks are only allowed to carry out the activities stated in their licenses. These functions will be decided by the Central Bank on a case-by-case basis.

1.1.2. Commercial Bank Finance

1.1.2.1. Concept of finance

Finance is an economic category that affects many different areas of the economy. According to the modern economic dictionary, finance represents capital in the form of money, that is, in the form of loans or capital contributions through financial markets or financial institutions. In other words, finance reflects the activities in which individuals, companies and organizations create money and use money resources to meet different development needs.

Thus, finance is characterized by:

- Finance is characterized not only by resources in the form of cash or deposits but also in the form of financial assets such as stocks, bonds or debt instruments that exchange or convey value.

- Finance involves the transfer of financial resources between entities, from entities with savings to entities in need of capital. At the macro level, the relationship between savings and investment represents the transfer of resources between individuals, businesses, and the Government in the overall economy.

With the above approach, the concept of finance can be understood in general: Finance is the movement of monetary capital taking place in all subjects in society, it reflects the synthesis of economic relationships arising in the distribution of financial resources through the creation or use of monetary funds to meet the different needs of subjects in society.

Commercial Bank Finance

A commercial bank is an intermediary financial institution, operating in the monetary field. Its main and regular activities are to receive deposits from customers with the responsibility of repayment, use that money to lend, perform discounting tasks and provide payment services. Thus, a commercial bank is a special enterprise that trades in the right to use monetary goods, performs the functions of credit intermediary, payment intermediary and provides services to customers.

Business activities: borrowing (buying capital) and lending (selling capital) of commercial banks to seek profits from interest rate differences have created cash flows entering and leaving banks, creating the movement of financial flows in commercial banks.

The movement of money flows in banks has given rise to economic relations in business associated with the creation, distribution and use of bank funds. Those economic relations are:

- The relationship between commercial banks and the State is shown through the State providing capital to state-owned commercial banks to operate and commercial banks performing financial obligations to the State such as paying taxes, fees, etc.

- The relationship between commercial banks and the State Bank is shown through the operations of required reserves, payments, and rediscount lending.

- The relationship between commercial banks and commercial banks is shown through operations in the interbank market.

- Relationship between commercial banks and businesses and individuals such as: Payment relationships in borrowing, lending, capital investment, asset trading...

- Internal relations within commercial banks such as: Payment of salaries, wages, bonuses, and fines to employees in the distribution of after-tax profits and the formation of bank funds.

Economic relations in the form of value, arising in the distribution process to create or use the bank's monetary funds to serve business, are the bank's financial relations.

From that, it can be understood that commercial bank finance is the movement of financial flows associated with the process of creating, distributing and using monetary funds arising in the business operations of the bank.

1.1.2.2. Financial characteristics of commercial banks

The business characteristics of commercial banks have determined the financial characteristics of commercial banks as follows:

One is: Commercial bank finance is highly sensitive to the business environment.

The input and output of banking activities are both money. That is the cash flow arising from purely financial operations: borrowing or lending in commercial banks. This is an independent cash flow, without a counterweight to the flow of goods and services. This movement is very sensitive, depending on the customers of the business process. Only when customers deposit money in the bank can the bank mobilize capital (financial input) and have capital to lend. Only when customers want to borrow capital from the bank can the bank lend (financial output). When the cash flow is in continuous motion, commercial banks can exist and perform their intermediary function.

Second: Commercial bank finance depends on the ability of commercial banks to create money.

Originating from the money creation function which is the unique function of commercial banks, commercial bank finance has the ability to increase the amount of money (non-cash lending) or can reduce the amount of money (non-cash debt collection) to provide means of payment for the economy while creating the most important source of capital to serve its business activities. Commercial banks create money by creating currency (book money), this ability to create money can only be realized if the capital that commercial banks mobilize in the form of deposits has been lent and the loan amount must circulate in the banking system. Money creation occurs after commercial banks lend by transfer within the same commercial banking system. The borrowing unit is debited from the lending account, the unit supplying goods or services to the lending unit is credited to the deposit account at a bank. Thus, in the above lending case, there is no source of capital but commercial banks can still lend. That is the nature of book money creation of commercial banks. Real money pens promote economic growth on the basis of new deposits created by the banking system.

Third: Commercial bank finance has a special capital structure.

To have working capital, production and business enterprises mainly use their own capital, so the minimum proportion of own capital must reach 30% of the total business capital of the enterprise. On the contrary, as a financial intermediary, banks mainly mobilize capital from economic sectors, so debt is the capital that accounts for the largest proportion, usually 80-90% of total business capital, while the bank's own capital accounts for a very small proportion (<10%). Thus, in terms of working capital, commercial banks mainly do business with other people's capital, which the bank does not own but only has the right to use under certain binding conditions.

Four: Some basic banking activities associated with businesses

Customers are the main subjects in the business activities of commercial banks. If customers have large financial potential, it is a condition for banks to mobilize a lot, and at the same time, investment lending will be effective. Through its capital mobilization and capital distribution functions, commercial bank finance has regulated capital, transferred capital from surplus to shortage areas, creating conditions for businesses to conduct normal production and business without interruption. Therefore, the qualifications, operational capacity and financial strength of the business will be the decisive factors for the capacity and financial strength of commercial banks. If the investing business suffers losses, financial liabilities increase, resulting in unrecoverable credits, leading to unhealthy financial status of the bank.

Five: Commercial bank finance always has great potential risks.

Starting from the method of "borrowing to lend", commercial banks conduct business activities mainly with capital mobilized from customers. This means that commercial bank finance may have to bear huge risks from both sides: the lenders and the borrowers of the bank. If capital is mobilized but not lent, it will cause capital stagnation and high business costs because the bank still has to pay interest to depositors. The cash flow that is not moving will not create profit for the bank, and may even lead to losses. Or if lending is not able to recover the debt, not only will the bank's own capital be lost, but the bank also risks not being able to repay the amount mobilized from customers, leading to insolvency. Thus, if customers encounter financial risks, commercial bank finance will immediately have to bear them. The important thing is financial risks.

The banking system itself has a serious impact on the economy, with the risk of spreading to the entire banking system, pushing the economy into recession.

1.2. FINANCIAL CAPACITY OF COMMERCIAL BANKS

1.2.1. Concept of financial capacity of commercial banks

“Bank finance” is the movement of financial flows associated with the process of creating, distributing and using monetary funds arising in the business operations of banks.

Thus, "Financial capacity of commercial banks" is the financial ability for banks to carry out and develop business activities effectively.

The financial capacity of a bank is not only the financial resources that ensure the bank's business operations but also the ability to exploit, manage and use those resources to effectively serve business operations. Financial capacity not only shows the current strength but also shows the potential financial strength, prospects and future development trends of that bank.

1.2.2. Criteria reflecting the financial capacity of commercial banks in the integration trend

The financial capacity of a bank is the use of financial capacity to create stable profits and achieve higher profits than other competitors or higher than the industry average, operate safely and achieve a better position in the market. Because the activities of commercial banks include: Capital mobilization, credit, investment, payment activities, the financial capacity of commercial banks is reflected in the business performance in the above activities.

The requirements for the system of indicators reflecting financial capacity are: i/ Correctly reflecting the nature of the concept of financial capacity of commercial banks, which is the financial ability to help banks carry out business activities effectively, not only in the short term but also in the potential and trends of long-term sustainability; ii/ Meeting the purpose of the assessment, which is to correctly determine the financial capacity and comparative position of a commercial bank compared to credit institutions in the domestic and foreign financial markets; iii/ Being able to collect statistical, accounting and calculable data; iv/ Must be consistent with standards and regulations.

international standards in financial - monetary - banking activities and accounting, bookkeeping and statistics. Specifically shown through the following indicators:

1.2.2.1. Large equity

The equity of a commercial bank is the entire capital owned by the bank owner, members of joint venture partners or shareholders in the bank, management fees paid by affiliated units...

Owner's equity includes two parts: initial owner's equity and owner's equity formed during operation.

Initial equity capital for commercial banks is capital provided by the State budget when newly established (for State-owned commercial banks), contributed by shareholders through the purchase of shares or stocks (for joint-stock commercial banks), including common shares and preferred shares. This capital level must be guaranteed to be equal to the legal capital level.

Owner's capital formed during operation (Additional owner's capital) due to additional shares issued or additional State budget allocation during operation, due to transferring part of accumulated profits, reserve funds, investment funds, additional charter capital, issuance of long-term debt papers, etc.

On the balance sheet of a commercial bank, equity includes the following basic items: Charter capital, undistributed profits and funds. Of which, charter capital is the capital recorded in the bank's charter, accounting for the largest proportion of equity capital and is very important in the business activities of commercial banks.

In the event of a bank going bankrupt or ceasing operations, the debt obligations will be paid in the following order: customer deposits, obligations to the government and employees, loans and finally to the owners. The larger the size of the owners' equity, the more secure depositors and lenders feel about the bank (other things being equal). Therefore, owners' equity is considered the basis for creating trust for customers.

At the same time, equity also shows the financial capacity and operational capacity of a bank. Equity affects the scale of business network expansion as well as the scale of operations of commercial banks: ability to mobilize capital, ability to expand credit, services, financial investment ability, and level of technological equipment.

Most of the equity is not directly profitable, they are prioritized to finance the construction of headquarters, working facilities, and technology investment. The remaining equity participates in the bank's business process.

Large equity capital allows banks to establish subsidiaries and participate in investment activities, joint ventures with strategic partners, contribute capital to companies and can acquire other banks according to regulations not exceeding 40% of charter capital and reserve funds.

International standards stipulate that banks cannot lend more than 15% of their capital and surplus to a single customer. For secured loans, the limit is 25%. With a large capital level, banks are allowed to lend to large projects, thereby increasing the scale of credit and increasing the scale of total assets.

Equity affects the ability to mobilize capital through the Leverage Ratio indicator.

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Average total liabilities
Leverage ratio	=
	Average equity

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And equity also affects the ability to expand the network. According to Circular 21/2013/TT-NHNN, the number of branches of a commercial bank established must ensure:

300 billion VND x N1 + 50 billion VND x N2 < C

In there:

- C is the real value of the charter capital of the commercial bank at the time of the request (in billion Vietnamese Dong).

- N1 is the number of branches established and proposed to be established in the inner city area of Hanoi and the inner city area of Ho Chi Minh City.

- N2 is the number of branches established and proposed to be established in the suburban areas of Hanoi, the suburban areas of Ho Chi Minh City; and other provinces and cities directly under the Central Government.

The system of transaction offices and branches of commercial banks is a direct channel providing banking services to customers. Commercial banks with a wide network will help customers access

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