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General Theories on Banking Service Quality

PART II

RESEARCH CONTENT AND RESULTS


CHAPTER 1:

OVERVIEW OF CONSUMER CREDIT SERVICE QUALITY AT COMMERCIAL BANKS

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1.1 Some theoretical issues

General Theories on Banking Service Quality

1.1.1 General theories about commercial banks

1.1.1.1 Concept of commercial bank

According to the Law on Credit Institutions (published on December 26, 1997) and the Law amending and supplementing a number of articles of the Law on Credit Institutions (effective from October 1, 2004): “ A bank is a type of credit institution that conducts monetary business and banking services with the regular content of receiving deposits, using this money to grant credit, providing payment services, and other related business activities”.

A bank is a special enterprise dealing in currency with regular activities of capital mobilization, lending, discounting, guaranteeing, providing financial services and other related activities. A commercial bank is an intermediary financial institution providing the most diverse portfolio of financial services with a total asset of up to 1,000 billion USD.

Thus, commercial banks, like other business organizations, operate for the purpose of making profit, and are special business organizations because their business object is currency. The difference between commercial banks and other financial organizations is that commercial banks are banks that trade in currency, mainly demand deposits, and provide payment services, while other financial organizations do not perform that function.

1.1.1.2 Functions and roles of commercial banks

a. Financial intermediary function

With the function of credit intermediary, Commercial Bank acts as a "bridge"

between those with surplus capital and those with shortage of capital and it has not only benefited

those with excess capital and those lacking capital but also bring economic benefits to itself and the economy. For banks, they will find profits for themselves from the difference between lending interest rates and deposit interest rates or brokerage commissions. This profit is the basis for commercial banks to exist and develop. For the economy, this function plays an important role in promoting economic growth because it meets the capital needs to ensure the production process is carried out continuously and to expand the scale of production. With this function, banks have turned idle inactive capital into working capital, stimulated the capital circulation process, and promoted production and business.

This is the most important function of a commercial bank.

determines the maintenance and development of the Bank

b. Commercial banks are payment intermediaries

The payment intermediary function means that the bank acts as a payment agent for customers by transferring money from one account to another at their request. Through this function, the bank acts as a "treasurer" for businesses and individuals because the bank is the one who holds the customers' money and pays money on their behalf. The more the market economy develops, the more this function of the bank is expanded.

Through the payment intermediary function, the commercial banking system contributes to economic development. When customers make payments through banks, it will reduce risks, reduce payment costs for customers, and at the same time, the speed of capital circulation of customers is faster, making the efficiency of capital use of customers increase. For commercial banks, this function contributes to increasing the bank's profits through the collection of payment fees. Moreover, it increases the bank's lending capital reflected in the balance of customers' deposit accounts. This function is also the basis for forming the money creation function of commercial banks.

c. Commercial banks are the source of money creation.

This is the consequence of the above two functions in banking activities: from a number of

initial reserves through lending and payment by transfer of

In banks, the amount of new deposits created is many times larger than the initial reserves, called the money creation process of the banking system.

After a bank receives a deposit, there will be a balance in the customer's deposit account at the bank. With this amount, after leaving a required reserve, the bank will invest and lend it, from which it will transfer to the deposit capital of another bank. With the circulation of capital through the credit and payment functions of the bank. Commercial banks perform the function of creating money.

1.1.2 General theories on consumer credit

1.1.2.1 Concept of bank credit

The concept of “credit” is derived from the Latin term “Creditium” which meansmeans trust. Credit can be understood as an advance of “present value” toin exchange for “future value” and the expectation that the “future value” will be greater than the “present value”present”. In the traditional concept, credit is a relationship in which onea person who transfers to another person the right to use a certain amount of value or thingunder certain conditions agreed upon by both parties.

Credit is defined as follows: “Credit is a concept that represents the relationshiprelationship between a lender and a borrower. In this relationship, the lender hasthe task of transferring the right to use money or goods lent to the borrowerwithin a certain period of time. The borrower is obliged to repay the amount of money or the value of goodsLoan is a loan that is repaid when due with or without interest.plays an important role in accumulating and utilizing temporarily idle capital sources.to grow business. ” 2

Thus, credit is the temporary transfer of a value from the owner to the user and after a certain period of time, a larger amount of value will be recovered than the original. It is an economic relationship between the lender and the borrower through which the movement of credit capital value is expressed in the form of money or goods within a certain period of time and with the principle that the borrower is responsible for unconditionally returning a larger amount of value than the original to the lender when due.


2 Assoc. Prof. Dr. Pham Hung Viet, “Encyclopedia” .

A new concept in the operations of commercial banks today is Credit granting: According to the Law on Credit Institutions No. 02/1997/QH10 passed by the National Assembly of the Socialist Republic of Vietnam on December 12, 1997, "Credit granting is the agreement of a credit institution for a customer to use a sum of money with the principle of repayment through the operations of Lending, Discounting, Financial leasing, Bank guarantees and other operations" 3 . Thus, credit granting is a banking credit activity expressed through specific operations.

1.1.2.2 The role of bank credit

a. For the economy

It can be seen that all economic activities are related to assets whose value is expressed in money. Money circulating in the economy is capital. All economic sectors need capital to serve business activities, production, services or other goals. Therefore, credit plays a very important role in the country's economy, there are five basic roles for the economy:

+ Firstly, bank credit promotes the establishment and development of enterprises according to the goal of national economic development. Bank credit participates in the entire process of production and circulation of goods, even service and non-production activities cannot be separated from the support of bank credit.

+ Second, bank credit is an economic lever to carry out expanded reproduction, apply modern advanced technology and techniques, improve productivity and economic efficiency, create many domestic and export consumer goods. Banks with the function of capital consumption, concentrating capital sources from within and outside the country have partly met the capital needs of the economy.

+ Third, bank credit is a funding tool for projects that create jobs, increase income, achieve poverty reduction goals and other social programs and projects.


3 Law on Credit Institutions No. 02/1997/QH10 passed by the National Assembly of the Socialist Republic of Vietnam on December 12, 1997.


.

+ Fourth, bank credit promotes the accumulation of production capital, expands the division of social labor and economic cooperation domestically and internationally.

+ Fifth, through the banking credit activities, the state can control production and business activities in the economy to propose appropriate economic management and legal measures and policies. The state can adjust the economic structure and activities of economic sectors through preferential policies on interest rates and lending conditions for enterprises investing in production according to the country's economic orientation goals.

b. For banks

+ Credit granting is the main activity that brings the largest source of income for banks. In developed countries around the world, the profits earned by banks from service activities account for a fairly large proportion. "In Vietnam, credit is the main activity that brings profits to banks, accounting for over 70% of total income, some banks have this ratio up to 90%" 4 . While service activities are not yet developed, banks increase outstanding loans to increase interest income from credit activities. Thereby

shows the importance of credit activities which are decisive for the existence and development of banks. At the same time, it also contains many potential risks.

+ As a capital consumption channel, from the concept that banks are a financial intermediary between Supply and Demand for capital, in which Supply is idle capital sources in the population, organizations, businesses... that banks mobilize and Demand are the subjects that need capital from banks to supplement and serve their production and business activities, we can easily see that bank credit is the consumption channel of mobilized capital of banks. In other words, credit is the main output in the business activities of banks.

1.1.2.3 Consumer credit

a. Concept

Consumer credit is credit that finances consumer spending, whether individual or household, such as buying houses, household appliances, or vehicles.

4 State Bank of Vietnam, “ Improving Risk Management Capacity of Vietnamese Commercial Banks” (Proceedings of Scientific Conference), Phuong Dong Publishing House.

again... or for other purposes such as education, health, travel... without mortgage

What assets do you need to prove income?

b. Characteristics

Borrower is an individual.

The main purpose of lending is to meet consumption, investment and business needs.

small individual business

Personal loan customers are often interested in interest rates and loan amounts.

they have to pay

Regarding interest rates, because the loan size is often small (≤ 50 million VND), leading to high lending costs, therefore, consumer loan interest rates are often higher than commercial loan interest rates.

The customer's debt repayment source is taken from income, not necessarily from the results of using those loans.

Customers who have jobs, stable income and education level

Questions are important criteria for commercial banks to decide to lend.

It is a lending activity without collateral, so it is a service product.

high risk business for the lending bank.

Short disbursement period.

Simple procedure.

c. The role of consumer credit

For banks

+ Enhance the bank's reputation.

+ Unsecured loans contribute to diversifying the product and service portfolio of the company.

banking, risk diversification and increased competition.

+ Capital disbursement creates additional income for the bank.

For customers

+ Capital needs are resolved quickly and conveniently in personal and family spending issues.

For society

+ Personal unsecured loan services contribute to improving the quality of life

of the people and contribute to stabilizing social order.

+ Is an effective stimulus tool, stimulating production and service industries to develop together.

1.1.3 General theories on banking service quality

1.1.3.1 Concept of service quality and credit service quality

1.1.3.1.1 Quality and service quality

a. Concept of quality

Quality is a concept familiar to people since ancient times. The concept of “quality” originated in Japan and became the top concern of material production industries, aiming at both the usefulness and convenience of products and minimizing waste in the production process.

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

From the above definition we can draw some characteristics of quality such as:

1/ Quality is measured by the satisfaction of needs. If a product for some reason is not accepted by the needs, it must be considered to be of poor quality, even though the technology used to manufacture the product may be very modern. This is a key conclusion and the basis for quality experts to determine their business policies and strategies.

2/ Because quality is measured by the satisfaction of needs, and needs always fluctuate, quality also always fluctuates over time, space, and conditions of use.

3/ When evaluating the quality of an object, we only consider all the characteristics of the object that are related to the satisfaction of specific needs. These needs are not only from the customer but also from related parties, such as legal requirements, needs of the social community.

4/ Needs can be clearly stated in the form of regulations and standards, but there are also needs that cannot be clearly described. Users can only feel them, or sometimes only discover them during use.

5/ Quality is not just an attribute of products and goods that we understand every day. Quality can be applied to a system or a process.

b. Service concept

Service includes all activities during the process in which customers and service providers interact with each other to satisfy the needs of customers and create value for customers.

That is why services have their own characteristics compared to other industries:

(1) The customer is a member of the service process.

(2) Production and consumption of products take place at the same time.

(3) Production capacity would be lost if not used because the service cannot exist.

can be stored and therefore lost if not used.

(4) The choice of service location is constrained by the customer: the customer and the service provider must meet for a service to be performed, so the location must be close to the customer.

(5) Use a lot of labor.

(6) Intangibility: customers cannot see, touch, or try the product in advance.

when buying

(7) Difficulty in measuring and evaluating the products created: counting the number of customers served is not a measure to evaluate the quality of the service performed.

c. Concept of service quality

The characteristics of services have created many differences in defining product quality and service quality. While consumers can easily evaluate the quality of tangible products through the form, design, packaging, price, brand reputation... through touching, holding, smelling, and looking directly at the product to evaluate, this is not the case.

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