Evaluation of internal control system for lending activities to corporate customers at the Joint Stock Commercial Bank for Industry and Trade - Lam Dong branch

HUE UNIVERSITY

UNIVERSITY OF ECONOMICS FACULTY OF ACCOUNTING AND FINANCE

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UNIVERSITY THESIS

EVALUATION OF INTERNAL CONTROL SYSTEM FOR LENDING ACTIVITIES FOR CORPORATE CUSTOMERS AT JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE - LAM DONG BRANCH

Student performed: Instructor: Doan Thi Dung

Class: K44B-KT

School year: 2010 - 2014 Master. Nguyen Ngoc Thuy

Hue, May 2014

ACKNOWLEDGEMENTS

To complete this graduation thesis, I would like to sincerely thank the teachers of Hue University of Economics for imparting me valuable knowledge during my time studying at this beloved school.

In particular, I would like to express my deep gratitude to Master Nguyen Ngoc Thuy for her dedicated help, guidance, and meticulous instruction throughout my internship and thesis completion.

I would like to express my sincere thanks to the Board of Directors of Vietinbank Lam Dong, especially the brothers and sisters in the corporate customer department and the staff of the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch for their attention, enthusiasm in exchanging and imparting to me a lot of experience, providing the most practical information, creating conditions for me to study and get acquainted with the actual working environment during my internship at the unit.

I would like to thank my family and friends for encouraging me, motivating me, and being my spiritual support during the past time.

Wishing all teachers, brothers and sisters in the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch, family and friends always good health, happiness and success in life.

Once again, my sincere thanks!

INDEX

PART I: PROBLEM STATEMENT 1

1. Reason for choosing the topic: 1

2. Research purpose: 2

3. Research objectives: 2

4. Research subjects: 3

5. Scope of research. 3

6. Research methods: 3

7. Novelty of the topic: 3

8. Topic structure: 4

PART II: RESEARCH CONTENT AND RESULTS 5

CHAPTER 1: SCIENTIFIC BASIS OF INTERNAL CONTROL SYSTEM IN COMMERCIAL BANKS IN GENERAL AND INTERNAL CONTROL SYSTEM OF LENDING ACTIVITIES IN BANKS

TRADE. 5

1.1. Overview of credit activities of commercial banks. 5

1.1.1. Concept of bank credit. 5

1.1.2. Characteristics of bank credit: 5

1.1.3. Types of bank credit. 6

1.1.4. Credit risk of credit activities. 7

1.1.5. The role of bank credit: 10

1.2. Overview of internal control in banking: 11

1.2.1. Concept of internal control, internal control system 11

1.2.2. Objectives and roles of internal control in banking. 12

1.2.3. The necessity of internal control for credit institutions. 13

1.2.4. Essential elements of an internal control system in a bank. 13

1.3. Internal control system according to Basel II: 18

1.4. Internal control of lending activities in commercial banks. 20

1.4.1. Overview of lending activities for corporate customers. 20

1.4.2. Internal control of lending activities for corporate customers. 31

CHAPTER 2: CURRENT STATUS OF INTERNAL CONTROL OF LENDING ACTIVITIES FOR CORPORATE CUSTOMERS AT JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE - LAM DONG BRANCH. 35

2.1. History of formation and development. 35

2.1.1. Formation and development process 35

2.1.2. Fields of operation 35

2.1.3. Organizational structure 37

2.1.4. Labor situation of Vietinbank Lam Dong over the two years 2012 - 2013. 39

2.1.5. Bank performance in 2011, 2012, 2013. 40

2.1.6. Capital mobilization situation of banks over 3 years 42

2.1.7. Outstanding debt situation 44

2.2. Current status of internal control over lending activities to corporate customers of the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch: 46

2.2.1. Organizational structure of internal control system in Joint Stock Commercial Bank for Industry and Trade. 46

2.2.2. Bank regulations on lending activities for corporate customers and economic organizations 50

2.2.3. Current status of internal control of the lending cycle at the Joint Stock Commercial Bank for Industry and Trade, Lam Dong branch. 55

CHAPTER 3: ASSESSMENT OF INTERNAL CONTROL SYSTEM IN CREDIT ACTIVITIES OF VIETIN BANK LAM DONG 69

3.1. Achievements 69

3.2. Problems and causes leading to problems in the credit cycle. 77

3.2.1. Existing problems: 77

3.2.2. Cause: 79

3.3. Evaluation of the implementation of regulations and control procedures by staff

bank employee. 80

3.4. Some solutions to contribute to improving the internal control system of lending activities at Vietin Bank Lam Dong: 84

3.4.1. Development orientation and development strategy of Vietinbank Lam Dong in the coming time. 84

3.4.2. Difficulties of Vietinbank Lam Dong in the coming time. 86

3.4.3. Complete solutions. 87

PART III: CONCLUSIONS AND RECOMMENDATIONS 92

1. Conclusion 92

2. Recommendation 93

LIST OF REFERENCES 188

LIST OF TABLES

Table 2.1 Data table on the number of employees at the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch. 39

Table 2.2. Data table on business performance at the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch over the 3 years 2011, 2012, 2013. (Specific data in Appendix 01) 40

Table 2.3 Data table on capital mobilization situation at Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch over 3 years 2011, 2012, 2013. (Specific data in Appendix 02) 42

Table 2.4 Data table on outstanding loans of the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch over the 3 years 2011, 2012, 2013. (Specific data in Appendix 03) 44

LIST OF DIAGRAM

Diagram 2.1: Organizational structure of Lam Dong Commercial Bank. 37

Diagram 2.2: Organizational structure of internal control system at NHCT. 46

Diagram 2.3: Organizational structure diagram of Lam Dong Bank's internal control system. 48

Diagram 2.4: Organizational structure chart of NHCT Lam Dong Risk Management Department 49

Diagram 2.5: Basic loan process diagram for corporate customers of Lam Dong Commercial Bank. 54

Diagram 2.6: Process of checking and monitoring lending activities for corporate customers at NHCT. 67

Diagram 2.7: Internal control process for lending activities to corporate customers at Lam Dong Commercial Bank. 68

LIST OF ABBREVIATIONS

Board of Directors

Board of Directors
BKS	Board of Control
CBPT	Analyst
CPTN	Operational staff
CBPKHDN	Corporate Customer Service Officer
CCDC	Tools and equipment
DN	Business
Director/ Deputy Director	Director/ Deputy Director
GHCV	Funding Limits
Board of Directors	Guarantee contract
Board of Directors	Board of Directors
HDTD	Credit Agreement
KHDN	Corporate Clients
KTKSNB	Internal control and audit
NHCT	Industrial and Commercial Bank
NHCTD	Credit granting bank
NHCV	Financing Bank
State Bank of Vietnam	State Bank
QLTCNB	Internal financial management
QLRR	Risk Management
CEO/Deputy CEO	General Director/Deputy General Director
TMCP/ TMCPCT	Joint stock commercial/ Joint stock commercial Industry and Trade
Ho Chi Minh City	Ho Chi Minh City
TSBD	Collateral
Production and business	Production and business

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SUMMARY OF RESEARCH CONTENT

Topic name: Evaluation of internal control system for lending activities for corporate customers at Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch.

The thesis presents the following main contents:

Firstly, the thesis presents the scientific basis of the internal control system in commercial banks in general and the internal control system of lending activities in commercial banks.

Second, to study the current status of the internal control system for lending activities to corporate customers at the Industrial and Commercial Bank, Lam Dong branch. This part includes the following specific contents:

- Overview of Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch.

- Loan process for corporate customers at Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch.

- Current status of controlling lending activities for corporate customers at the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch in the following periods:

- Internal control before granting credit.

- Internal control during credit granting.

- Internal control after credit granting.

- Provide assessments of the internal control system for lending activities to corporate customers at the Industrial and Commercial Bank, Lam Dong branch: achievements, shortcomings and causes leading to those shortcomings.

Thirdly, it presents the difficulties and advantages in internal control work and the development plans, orientations and strategies of the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch in the coming period, thereby giving some recommendations and proposing solutions to contribute to perfecting the internal control system for lending activities in the bank.

PART I: PROBLEM STATEMENT

1. Reason for choosing the topic:

In today's economy, it can be said that banks are the lifeblood of the economy. A country's banking system operating smoothly and effectively is a prerequisite for economic and social development. A developed banking system is the basis for the effective allocation and circulation of financial resources, stabilizing the value of money, reducing unemployment and inflation, and at the same time being a financial intermediary, a payment center, and capital transfer, contributing to modernizing the way the economy operates.

Banks play a very important role in the economy, but not every country can build a modern and effective banking system. Banking is an activity that contains many risks, and fraud, if not handled promptly, will cause huge losses. In 2009, the collapse of the banking system in the United States, leading to the global economic crisis, was a practical proof of that. Most recently, the local crisis of the banking system in the United States also caused great economic and social damage. The United States is considered a modern country in all aspects, especially the system and scale of the large banking industry, among the top in the world, but it is not immune to collapse and crisis. This shows that management and control in banks is a job that requires a lot of knowledge, experience, and expertise and plays a very important role in the bank's business operations, especially internal inspection and control. A bank with an effective internal inspection and control system will ensure that the bank's assets are used appropriately, avoiding losses and risks to capital, money, etc., maintaining high reliability of financial information, compliance with regulations, building trust with customers and shareholders, creating opportunities for the bank to develop remarkably.

The work of building, operating and perfecting the internal control system of banks in Vietnam is a difficult problem for the State Bank, authorities and banks today. Especially in 2012 and 2013, the economy is facing many difficulties, especially for the banking industry, so the work of inspection and control

Internal control is increasingly focused and improved by banks. Banks in Vietnam are trying to research, perfect and successfully apply the internal control model according to the Basel II model with the hope of removing all difficulties in management, inspection and internal control in banks. Vietinbank is a pioneer bank in this innovation. Vietinbank is making efforts to complete the innovation of the internal control system according to the Basel II model, phase 2, to improve the quality of management and risk control. Realizing this, I decided to conduct research on the topic "Evaluation of the internal control system for lending activities to corporate customers at the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch".

2. Research purpose:

The thesis was carried out not only to meet the requirements and regulations of the University of Economics - Hue University for each student in the final internship. But also from the desire of the individual to practice, rub, work in a real environment, want to research, learn about the internal control system at commercial banks.

The thesis studies and evaluates lending activities and internal control systems for lending activities at commercial banks in general, thereby analyzing and evaluating the current status of lending activities and internal control systems for lending activities at the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch.

3. Research objectives:

The research thesis addresses the following issues:

Research on theoretical basis of lending activities and lending control process for corporate customers at commercial banks.

Analyze and evaluate the current status of lending activities and the process of controlling lending activities at the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch.

Proposing some solutions to contribute to improving internal control of lending activities for corporate customers at the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch.

4. Research subjects:

The research object of the topic is lending activities for customers who are enterprises and economic organizations; lending process; controlling lending activities at the Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch .

5. Scope of research.

Time: from February 10, 2014 to May 18, 2014.

Location: Corporate Customer Department and Risk Management Department at Joint Stock Commercial Bank for Industry and Trade - Lam Dong Branch.

Research content: The topic only stops at researching and evaluating the internal control system of lending activities for corporate customers.

6. Research method:

Direct interview method: direct interview with officers and employees in the Corporate Customer Department and Credit Risk Management Department, Board of Directors.

Observation method: perform some work and observe officers and employees in the bank performing activities.

Data collection and processing methods: collect, compile, and process data and information collected to facilitate the completion of the research topic.

Analysis method: Analysis based on available data. Mainly analyze the indicators in financial statements, outstanding debt reports... to know the business performance of the unit; based on the lending process, the process of controlling lending activities to corporate customers, from there analyze, draw conclusions, give advantages and disadvantages to find out the causes and solutions.

Comparison method: based on data to make comparisons (absolute and relative) between periods and years to find out the increase or decrease in value to support the business analysis process as well as other processes.

7. Novelty of the topic:

The topic of internal control system for lending activities has been carried out in previous years, however, the topic that I carry out is with the desire to go deeper into the internal control system of commercial banks, in which the focus is on the internal control system for lending activities for corporate customers.

Evaluation of internal control system for lending activities to corporate customers at the Joint Stock Commercial Bank for Industry and Trade - Lam Dong branch - 1

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