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Credit quality assessment at the Bank for Agriculture and Rural Development, North Song Huong branch, Thua Thien Hue province - 1


PART I. PROBLEM STATEMENT


1. REASONS FOR CHOOSING THE TOPIC

In a market economy, the banking system is considered the nervous system of the economy. A smooth, healthy and efficient national banking system is the premise for financial resources to circulate, allocate and use effectively, stimulate economic growth, stabilize currency value and create jobs.

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In the activities of commercial banks, credit activities are one of the fundamental operations, accounting for a high proportion in the asset structure and income structure. Credit activities are the leading economic function of banks with the purpose of financing targets for individuals, enterprises and government agencies. Bank credit activities have a close relationship with the economic development situation, promoting the growth of enterprises, creating vitality for the economy.

Credit quality assessment at the Bank for Agriculture and Rural Development, North Song Huong branch, Thua Thien Hue province - 1

Along with the economic innovation trend, the Vietnamese banking system is also in the process of innovation and has achieved certain successes in the trend of integration and increasingly fierce competition. Not outside the general integration trend, the Vietnam Bank for Agriculture and Rural Development (Agribank) has also made many innovations in perfecting products and aiming at the goal of serving customers best. The Agribank system of Vietnam in general and the Agribank Bac Song Huong branch of Thua Thien Hue province in particular are expanding the market, increasing market share in the most effective way with the policy of being consistent with the goal of "Industrialization and modernization". However, credit granting activities are complex and potentially pose great risks for commercial banks. Therefore, during the graduation internship at the Agribank Bac Song Huong branch of Thua Thien Hue province, with practical knowledge and learned knowledge, it is realized that the credit activities of banks in recent years have changed a lot but are still difficult.

Therefore, I chose the topic "Evaluation of credit quality at the Bank for Agriculture and Rural Development, Bac Song Huong Branch, Thua Thien Hue Province" as the content of my graduation thesis.


2. RESEARCH OBJECTIVES:

Based on the theory of bank credit activities, I will analyze and evaluate the current status of operations and credit quality, thereby proposing solutions to improve the quality of credit activities at the Bank for Agriculture and Rural Development, Bac Song Huong branch, Thua Thien Hue province.

To achieve the above general objective, the topic aims to solve the following specific objectives:

- Systematize basic theoretical issues on credit and credit quality

in the business activities of commercial banks.

- Analyze the current status of operations and credit quality at the Bank for Agriculture and Rural Development, Bac Song Huong branch, Thua Thien Hue province.

- Proposing directions and solutions to improve the quality of credit activities

at the Bank for Agriculture and Rural Development, Bac Song Huong branch, Thua Thien Hue province.

3. OBJECTS AND SCOPE OF RESEARCH:

a. Research objects:

The topic focuses on studying the quality of lending credit and solutions to improve the quality of lending credit at the Bank for Agriculture and Rural Development, Bac Song Huong branch, Thua Thien Hue province.

b. Scope of research:

- About space: At the Bank for Agriculture and Rural Development, Bac Song Huong branch, Thua Thien Hue province

Thien Hue

- About time: Research on credit activities at the Bank for Agriculture and Rural Development, Bac Song Huong branch, Thua Thien Hue province over 3 years from 2010 to 2012.

4. RESEARCH METHODS:

- Data collection method: is a secondary data collection method.

Secondary data collection method is the method of collecting information and data related to the research topic from available documents. That is, statistical data from reports such as summary reports, business performance reports, etc. In addition, the method of collecting information from sources such as magazines and the internet is also very important.


- Methods of data analysis and processing.

During the research and data collection process, by screening and selecting reliable information. Then use the following methods:

- Statistical and synthesis method: collect information and data and then synthesize necessary information for research.

- Comparison method: This method is used to compare indicators, each indicator reflects a different aspect of credit activities. Study the level of fluctuation of indicators in relative numbers, absolute numbers, the increase and decrease in value over the analysis periods to see the fluctuations of the branch.

+ Absolute number method:

It is the result of comparing the value of the year of analysis with the base year of economic indicators. The absolute number has important meaning because through the absolute number we will have specific perceptions about the actual scale and volume of the research phenomenon.

Absolute increase (+) decrease (-) = Next period's index - Previous period's index

+ Relative number method:

* Relative dynamic number: often used to express the change in the level of the research phenomenon over a period of time. Relative dynamic number is calculated by comparing two levels of the same type of phenomenon in two different periods and calculated in number of times or percentage.


Relative dynamic number =

Research level Base level


x 100

* Relative structural number: reflects the proportion of each part in the whole. Calculated by comparing the absolute level of each part with the level of the whole.


Relative structural number =

Part level

Overall level


x 100


- Other methods: use observation methods to have a more general and comprehensive view of the research situation.


5. THESIS STRUCTURE: Part I. Problem statement.

Part II. Research content and results.

Chapter 1: Basic issues of credit and credit quality.

Chapter 2: Current status of credit quality at the Bank for Agriculture and Rural Development, Bac Song Huong branch, Thua Thien Hue province.

Chapter 3: Some solutions to contribute to improving credit quality at the Bank for Agriculture and Rural Development, Bac Song Huong branch, Thua Thien Hue province.

Part III. Conclusion


PART II. RESEARCH CONTENT AND RESULTS CHAPTER 1: BASIC ISSUES ON CREDIT AND CREDIT QUALITY


1.1. GENERAL THEORY OF BANK CREDIT

1.1.1. Concept of bank credit.

The theoretical basis for the birth of credit is the birth and existence of private economic relations, associated with the development of the division of labor. Production relations were born, dividing the rich and the poor. The tendency for wealth to be increasingly concentrated in the hands of those in power, making them increasingly rich, while many other people with low incomes are in great need of capital. To resolve the above contradiction, credit relations were born.

Credit relations were born and existed from the objective requirements of the capital circulation process to solve the phenomenon of capital surplus and shortage that often occurred between subjects in the economy. When capitalism appeared, the simple production process on a small scale was gradually replaced by expanded reproduction with both breadth and depth. Capitalists established credit relations with each other in the form of special goods or currency.

Credit comes from the Latin root: Credittum – meaning trust and confidence. Credit is explained in Vietnamese as borrowing.

According to Associate Professor, Dr. Nguyen Van Tien (2009) Commercial Banking Textbook : Credit is the temporary transfer of a value (asset) from the owner to the user within a certain period of time; when due, the user must repay a value greater than the original value. Thus, the credit category has three main contents: temporary transfer of a value, term and repayment.

Therefore, bank credit is the agreement between the bank and the customer to use assets (in cash, real assets or reputation) with the principle of repayment through lending, discounting, financial leasing, bank guarantees and other operations.


1.1.2. Classification of bank credit.

As the market economy develops more and more, the trend of liberalization becomes deeper, so banks must research and offer diverse forms of credit to best meet the needs of customers, thereby diversifying investment portfolios, attracting customers, increasing profits, spreading risks and standing firm in competition. Therefore, people classify credit according to the following forms:

1.1.2.1. Based on the purpose of credit

- Real estate credit : short-term credit for construction and land expansion,

long-term credit to buy land, houses, etc.

- Industrial and commercial credit : credit granted to businesses to purchase goods, raw materials, pay salaries, pay taxes, etc.

- Agricultural credit : credit to support farming, harvesting and livestock raising activities.

- Consumer credit : credit granted to individuals and households for shopping

expensive goods such as cars, mobile homes…

1.1.2.2. Based on credit term

- Short-term credit : type of credit with a term of less than 01 year and used to compensate

cover temporary working capital shortage of enterprises and personal consumption.

- Medium-term credit : type of credit with a term of 01 to 05 years and used

to purchase fixed assets, renovate equipment, expand production...

- Long-term credit : credit with a term of over 5 years, meeting the needs

long-term investment such as basic construction, infrastructure construction...

1.1.2.3. Based on credit guarantee

- Secured credit : type of credit with collateral, mortgage or third party guarantee.

- Unsecured credit : a type of credit without collateral, mortgage or third-party guarantee, but based solely on the customer's own reputation.

1.1.2.4. Based on loan repayment method

- Installment credit : is a type of credit in which the customer must repay the principal and interest.

Periodically in equal installments. Apply for large loans and long terms.


- One-time repayment credit : a type of credit in which the customer only repays the principal and interest once when due. Applicable to small loans and short terms.

- Demand repayment credit : a type of credit in which the customer can repay the loan at any time. Applicable to overdrafts and credit cards.

1.1.2.5. Lending methods

- Single loan : each time the customer and the credit institution borrow capital, they carry out the necessary loan procedures and sign a credit contract.

- Lending according to credit limit : The credit institution and the customer determine and agree on the credit limit to be maintained for a certain period of time.

- Loans for investment projects : Credit institutions lend capital to customers to carry out projects.

invest in developing production, business, services and investment projects to serve life.

- Syndicated lending : a group of credit institutions jointly lend to a project or

Customer loan plan

- Installment loan : The credit institution and the customer determine and agree on the principal amount and the principal amount divided into several installments during the loan term.

- Lending according to the reserve credit limit : The credit institution commits to ensuring readiness to lend capital to customers within a certain credit limit.

- Lending through the issuance and use of credit cards : Credit institutions accept loans from customers to pay and withdraw money at automatic teller machines and cash advance points.

- Loan according to overdraft limit.

1.1.3. The role of credit in a market economy

In a market economy, strong production development will promote the development of commodity economy in every country in the world. However, in order for the production process to be expanded and increasingly perfected, we must mention the role of bank credit.

1.1.3.1. Bank credit is the optimal capital financing tool

Because the social reproduction process is regular and continuous, the demand for capital is always high. Meanwhile, there are organizations and individuals with temporarily idle capital for a certain period of time. The party in need of capital can borrow capital at low cost and in time to complete their work, the party with excess capital can gain a profit during the time when their capital is not used.


Therefore, the circulation of temporarily idle capital together with savings from the population, budget reserves... are mobilized and used by commercial banks to invest in enterprises that are temporarily short of capital, for consumption needs that temporarily exceed people's income, as well as for spending requirements of the State Budget when there is no revenue...

Bank credit promotes the process of capital concentration and production concentration: through the concentration and prioritization of capital for spearhead economic sectors and key economic sectors, which are places with extremely large capital needs, from there bank credit contributes to enhancing the strength and competitiveness of the economy, creating conditions for developing economic relations with foreign countries...

1.1.3.2. Bank credit is a tool for regulating the amount of money circulating in the State's economy.

The State Bank uses credit as a tool to regulate the amount of money in circulation through the implementation of monetary policies such as required reserves, rediscount rates, open market instruments, etc. When the State Bank provides credit to the economy, it means creating a money supply and vice versa, the State Bank reduces credit, which means reducing the amount of cash in circulation. Currently, implementing credit also means limiting cash payments. The purpose is to reduce the amount of cash in circulation to avoid inflation.

1.1.3.3. Bank credit meets the needs of savings and investment expansion for

economy

Bank credit is a tool that helps the State Bank implement its monetary policies well and at the same time creates an effective business environment for commercial banks. If the currency value is stable, it will help banks mobilize the maximum potential capital from the population to meet the demand for expanding investment in the economy.

From satisfying the capital needs of enterprises to modernize machinery and equipment, innovate production technology or invest in credit in key industries, credit has contributed to reducing costs and improving competitiveness. These factors have helped people have a source of savings, creating favorable conditions for investment in industries in the economy.


1.1.3.4. Bank credit is the main activity that brings profit to banks.

commercial goods

In the monetary business of commercial banks, credit is always the largest item. Credit operations are increasingly diversified, increasing the role of credit in the overall business of commercial banks and therefore, income from credit operations accounts for the majority of profits, determining the efficiency of the bank's business operations. Through credit operations, banks have diversified their asset portfolio, minimized risks and created the main source of profit.

1.1.3.5. Bank credit is a tool that contributes to strengthening the economic planning regime of economic units.

The basic characteristic of credit is the movement on the basis of repayment with interest. Therefore, credit activities reflect the production and business results of each unit and the quality of operations of each economy. Bank credit requires units to use capital effectively, promote capital turnover. Borrowing units must commit to using capital for the right purpose, effectively, and repaying capital and interest on time. Moreover, when borrowing from banks, enterprises must present full annual financial reports in a timely, accurate, and transparent manner. Thus, bank credit plays an important role in the socio-economic development of a country, it promotes economic growth and development. Therefore, credit quality is an important issue for banks.

1.1.4. Credit granting process

Here are the steps in the credit granting process:

- Step 1: Receive and guide customers.

- Step 2: Check the application and loan purpose.

- Step 3: Appraisal of business plan and production plan.

- Step 4: Loan approval

- Step 5: Sign the credit contract and related contracts.

- Step 6: Disburse and monitor the loan.

- Step 7: Collect interest and principal.

- Step 8: Contract liquidation and credit file storage.


1.2. CREDIT QUALITY AND THE NEED TO IMPROVE IT

CREDIT AMOUNT

1.2.1. Concept of quality

Quality is a complex category, still causing much controversy among theorists and researchers to find a way to define the two words quality. Each person from a different perspective will have a different understanding. Below are some common concepts about quality:

According to the International Organization for Standardization ISO, in the draft DIS 9000:2000: "Quality is the ability of a set of characteristics of a product, system or process to meet the requirements of customers and related parties".

According to WEDeming - the father of quality management - "Quality is satisfaction".

“Quality is fitness for use”. According to JMJuran, “quality is fitness for use”.

That is one of many ways to define quality that researchers analyze quality, depending on the research object and analysis position to understand it in an appropriate meaning.

1.2.2. Concept of credit quality

Credit quality (CLTD) is generally understood as the satisfaction and response to customer needs in accordance with socio-economic development and ensuring the existence and development of credit institutions providing that credit product.

In fact, CLTD is related to many economic entities and plays an extremely important role in the economy, so CLTD is mentioned from many different perspectives:

- For customers: High CLTD means that loans are provided

Full quantity, on time, reasonable interest rate with quick approval time.

- For banks: The basic principle for credit activities is that the loan capital is repaid both principal and interest on time. Therefore, talking about CLTD means that the credit is guaranteed to be safe, used for the right purpose, in accordance with the bank's credit policy, repaid both principal and interest on time, bringing the bank low operating costs, increasing the bank's competitiveness in the market, strengthening economic relations, serving growth and development.


- For the economy: Quality credit means mobilizing the maximum amount of temporarily idle monetary capital from the people and implementing investment loans for economic development according to the State's direction in the most effective way.

From that, we can see: CLTD is a concept that is both specific (expressed through calculable criteria) and abstract (expressing the ability to attract customers, impact on the economy, etc.). Credit quality is influenced by subjective factors (management ability, staff qualifications, etc.) and objective factors (changes in the economic environment, etc.).

Within the scope of the research, the author evaluates credit quality from the perspective of banks. Improving credit quality is a task that needs to be focused on and concerned at commercial banks.

1.2.3. Factors affecting credit quality

1.2.3.1. Factors on the bank side

-One is the quality and qualifications of the staff.

The quality of the bank staff is the decisive factor in the success or failure of the bank's business activities in general and credit activities in particular. Because credit officers are the ones who directly participate in every stage of the credit process.

In fact, the quality of credit, high or low, depends largely on the selection and training of staff of each commercial bank. A commercial bank with a staff of highly qualified and ethical staff will achieve high results in credit management and other banking activities.

-Second is business strategy.

To achieve its goals, each bank must set out its own business strategies that are appropriate to its potential and strengths. Based on the overall business strategy, it is possible to have appropriate departmental strategies and plans for each period. Commercial banks must have specific business strategies to avoid being passive in business.

-Third is credit policy.

Credit policy is one of the strategic business policies of the bank. It has a decisive meaning for the success or failure of a commercial bank. A correct policy will attract many customers, ensuring the ability to make a profit from credit activities on the market.


The basis is risk dispersion. Therefore, if commercial banks want to have good credit quality, they must have

a suitable policy.

-Four is the credit process

Credit process is a collection of basic contents, operations, and steps in lending and debt collection activities to ensure credit quality. Ensuring the lending process is very important for each banking system, it ensures consistency in the credit process. For different customers, banks can be flexible, implementing steps in the credit process appropriately.

-Five is the credit information system

To limit the risks in credit activities that may occur, commercial banks need to have a complete information system for each customer. Timely and accurate grasp of customer information flows is a condition for reviewing and analyzing to find good business opportunities as well as preventing possible risks.

-Six is ​​the work of bank organization

To create conditions to improve credit efficiency, there must be smooth coordination between departments, solidarity from top to bottom, from the board of directors to all staff of the commercial bank. Well-organized banking work is the basis for conducting healthy credit operations.

-Seven is the issue of inspection and supervision.

One of the activities that aims to help banks avoid the above risks is inspection and supervision. Arranging competent, qualified, highly responsible and good-quality staff to carry out inspection and supervision is an important issue.

1.2.3.2. Customer factors

-Customer capacity

The customer's capacity is the deciding factor in whether the customer can use the loan effectively or not. If the customer's capacity is weak and cannot predict the market fluctuations, it can lead to the customer not being able to repay the debt, the bank can be passive in investment, thereby causing the credit quality to decline and affecting the general economy of society.


-Customer loyalty

Customer honesty affects the credit quality of the bank. If banking enterprises do not provide complete information and accurate and honest data, it will cause difficulties for the bank in verifying and managing the business performance of that enterprise.

-Risks in the business of the customer

In production and business, risks arise in many different forms such as natural disasters, fires, weak production and business capacity, impacts from changes in government policies, etc., which will affect the repayment of bank loans. If the enterprise increases the cost of products, it will create pressure on the consumption of goods, and the ability to recover capital will be slow. Therefore, it is easy to violate the repayment period.

-Collateral

In reality, there are many assets of legal entities and individuals without ownership certificates. Fixed assets are mostly outdated factories, machinery, etc. that do not meet the standards for mortgage. Meanwhile, the demand for bank loans is very large.

1.2.3.3. Factors related to the banking operating environment

-Economic environment

Talking about the socio-economic environment means talking about the national and world economy as a whole. All components participate in the socio-economic environment, so the economic environment affects the operations of banks.

A stable economy will lead to a more liberal credit policy than an economy subject to seasonal and cyclical fluctuations. Many borrowers prosper in prosperous times but capital may be lost in recessions.

The main reason for the existence of banks is to serve the credit needs of the community. In theory, banks lend to customers who have reasonable and economically sound requirements. The level of development of the locality determines the scale and volume of credit investment. If credit investment exceeds the necessary volume and is not suitable for the needs of economic development, it will affect the quality of credit.

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