Increasing the Difference Between Lending and Deposit Interest Rates

Both economic organizations and individuals think that accessing credit is difficult, the procedures are cumbersome and time-consuming... Therefore, local banks need to promote propaganda and promotion so that customers can grasp the policies, strategies, and services of the bank. It is possible to promote and advertise through the following channels: Direct channels: through relationships with friends, relatives,... Indirect channels: such as newspapers, television stations, billboards, posters, leaflets, websites, sponsoring competitions, participating in business support programs organized by localities...

 Increase competitiveness through diversifying customer base.

Improving the efficiency of credit activities shows that the scale of credit is increasing, banks need to diversify their customer base, diversifying customers helps banks grow credit based on different portfolios and at the same time disperse risks. Banks should not focus too much on a few specific customer segments, in the recent past, most state-owned commercial banks have focused on lending to state-owned enterprises and large corporations. This may initially bring high business efficiency but in the long run, it can easily lead to risks, especially when there are changes in state policies. Therefore, banks need to selectively develop their customer portfolio from large customers to small and medium-sized enterprises, individual customers, etc.

In expanding customer marketing, there will be a wave of customers switching credit relationships from one bank to another, so local banks need to comply with the current credit regulations of the State Bank. Do not set unfair competition goals that can cause risks to the bank and damage the brand image.

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Local banks must also actively participate in business connection programs with local authorities such as business connection programs between banks and enterprises organized by associations of departments, agencies, and sectors. Continuously organize customer conferences, take care of and show gratitude to customers who bring a lot of profit to the bank.

 Enhance competitiveness through the application of effective customer care policies

In the current conditions, banking activities have fierce competition, competition between domestic banks as well as competition between domestic banks and foreign banks. With most banks providing products and services that are almost indistinguishable from traditional banking products to the design of new products, customer care is like

an effective measure to improve competitiveness.

If banks build and implement good customer care for each different customer group, it will be a free but effective form of advertising. From good care, customers will continue to use products and services, helping to reduce business costs, increase profits, help create loyal traditional customers, and be an effective competitive weapon in the market. Depending on each type of customer, banks need to carry out appropriate care activities to stimulate demand, attract and retain customers, and at the same time expand and capture market share. Banks also need to clearly identify 3 types of customers to have appropriate care policies depending on the characteristics and capabilities of each customer, including: potential customers, customers who have stopped using products and services, and traditional customers.

4.2.2. Increase the difference between lending and capital mobilization interest rates

The interest rate difference between lending and mobilization is actually specified from the Net Interest Margin (NIM) which is an index used to determine the difference between interest income and interest expenses of the bank. With the current interest rate developments, banks face challenges in increasing this coefficient due to the following factors: the impact of Circular 06 on the ratio of short-term capital for medium and long-term loans; pressure from inflation; competition between banks; the ability to keep lending interest rates stable as required by the Government, so the management of input and output interest rates plays a very important role.

4.2.2.1. Reasonable loan interest rate management

To manage stable lending interest rates, banks need to balance the actual capital needs of the economy as well as the liquidity of each bank to set appropriate lending interest rates that are not too high compared to the market and not too low to avoid unhealthy competition in the market. The management of lending interest rates must be consistent with the State Bank's policies in each period.

Banks also need to change their lending structure to high interest rate areas such as lending to small and medium-sized enterprises (SMEs), personal consumer loans, and reduce the proportion of lending to low interest rate areas such as lending to large enterprises.

... To ensure that lending capital in high interest areas is usually medium and long-term lending, banks also need to increase the mobilization of medium and long-term capital to ensure safety limits when lending such as the ratio of short-term capital allowed for medium and long-term lending. In addition, to prevent interest rates from increasing sharply and still ensure income

From lending, banks need to cut costs to reduce the spread. At the same time, it is necessary to control credit structures to avoid leaning towards a certain sector, for example, not pouring capital into real estate loans, while other production and business sectors are lacking capital...

4.2.2.2. Minimize input interest costs

To increase the income from bank lending, banks also need to balance reducing the average mobilization interest rate to reduce input costs. This is not a simple goal for banks when the current liquidity situation of banks is not guaranteed at its best.

Therefore, to effectively manage the average mobilization interest rate to meet the profit efficiency, banks need to closely follow the government and State Bank's directive policies, operate healthily, reduce bad debt, manage the loan structure reasonably, especially gradually reduce medium and long-term loans, promote short-term loans for production and business enterprises with low capital turnover, thereby high loan turnover, reducing loan interest rates still does not affect the lending efficiency of banks. It is necessary to approach low-interest capital mobilization based on service development such as non-term capital of individual customers using bank cards, non-term capital of enterprises through loans managed according to the bank's cash flow...

4.2.3. Reducing bad debt

It can be seen that the bad debt ratio of the entire banking sector has not fluctuated much in the past ten years. However, according to the assessments in the previous section, a large part of the bad debt has been sold to VAMC, so in fact, the bad debt that banks need to handle is much larger. The published bad debt data still does not reflect the true situation of the banks. To handle bad debt in the current period, the State Bank has taken many actions such as temporarily suspending the issuance of licenses to establish new banks to focus on consolidating and rectifying existing banks. The State Bank has actively directed the merger, consolidation, and acquisition of weak banks on a voluntary basis and in accordance with the law. Thanks to that, the number of banks and foreign bank branches has gradually decreased, especially weak banks. From 2011 to now, there have been 15 domestic credit institutions and foreign bank branches.

Although there are many policies of the State Bank as well as efforts of credit institutions in debt settlement, however, currently the work of handling bad debt still faces many difficulties and challenges, such as lack of mechanisms and policies to encourage and support debt settlement.

bad debt, collateral assets, complicated procedures for handling collateral assets, litigation and enforcement, causing time and cost in the process of handling bad debt. The debt trading market has not yet developed, causing difficulties in the purchase and sale of debt and collateral assets. The legal framework for handling debt and collateral assets still has many shortcomings, amending related laws takes a lot of time, greatly affecting the progress and goals of handling bad debt. One reason is that borrowers have not proactively restructured their operations, strengthened their financial and management capacity and removed difficulties in production and business to repay bank loans. The implementation of restructuring state-owned enterprises has only achieved initial results, many financial issues and bad debts of state-owned enterprises have not been vigorously handled... Therefore, to basically handle bad debt according to the Government's orientation, banks need to perform well the following basic tasks:

Focus on perfecting the legal framework, safety regulations on credit granting and bad debt trading and handling mechanisms. Banks in Hanoi need to effectively and synchronously implement solutions to handle bad debts according to the Project on restructuring the credit institution system associated with handling bad debts in the period of 2016-2020 approved by the Prime Minister in Decision No. 1058/QD-TTg dated July 19, 2017 to bring the bad debt ratio to below 3%. The implementation of solutions by the Government and the State Bank is based on banks strictly implementing risk provisions, correctly classifying debts as a basis for provisions for assets that are difficult to recover and actively selling debts to VAMC. Banks must fully implement measures according to each bank's perspective as well as specific instructions from the State Bank to control credit quality well, including profit distribution measures to retain profits to restructure and make provisions instead of distributing them to shareholders when the principles of risk provisions have not been properly implemented as in previous years.

The State Bank of Vietnam needs to strengthen the inspection and supervision of credit quality as well as compliance with legal regulations on credit, debt classification, provisioning, and use of risk reserves to clarify the bad debt situation and have appropriate measures to handle bad debt. Through inspection, it is necessary to promptly detect violations, take strong measures against credit institutions that do not comply with regulations, and at the same time, there needs to be close supervision after the inspection.

Banks need to actively set aside and use risk reserves to handle bad debts such as; urging debt collection; handling collateral; focusing on selling bad debts to VAMC; minimizing costs, limiting unreasonable salary and bonus increases; reducing annual dividend payments to create financial resources to handle bad debts; continuing to support capital for loan customers.

with appropriate interest rates to overcome difficulties, restore production and business, thereby having revenue to repay bank loans.

Banks need to closely coordinate with relevant agencies and organizations to complete the legal framework for the purchase and sale of bad debts through VAMC. In handling bad debts, there needs to be close coordination with police agencies and prosecution agencies such as courts and enforcement agencies, especially close coordination with local authorities in auctioning and handling secured assets. It is necessary to coordinate and effectively implement Resolution 42/2017/QH14 on piloting the handling of bad debts of credit institutions approved by the National Assembly on June 21, 2017, effective from August 15, 2017. Accordingly, the Resolution has loosened the debt handling mechanism for credit institutions such as; Expanding the debts that can be bought and sold by VAMC, allowing the transfer of bad debts purchased with special bonds to be bought and sold at market value, helping to create a market for buying and selling debts at market prices, ensuring market principles in handling bad debts, adding more subjects that can sell debts, adding more rights to seize assets to ensure bad debt handling of credit institutions for bad debts.

Banks in the area need to effectively implement Directive No. 02/CT-NHNN dated January 10, 2017 on strengthening the safety of the credit institution system, continuing to promote the restructuring of the credit institution system and handling bad debts in 2017.

Therefore, to thoroughly handle the problem of bad debt, in addition to the efforts of the banking sector as implemented in the past, there needs to be a more drastic participation of the entire political system in supporting resources, perfecting the legal framework, creating a favorable macroeconomic environment, supporting business development and promoting the development of the real estate market and financial market, supporting credit institutions to recover debts and assets, including speeding up the investigation, trial and execution of cases related to banks.

4.2.4. Improving collateral valuation

Currently, asset valuation plays a very important role when banks lend based on the value of collateral. In fact, the asset valuation work at commercial banks today still has many shortcomings, highly internal in nature. Compared to other countries, valuation services, especially valuation for commercial banks in Vietnam, are still in the early stages of development. According to Nguyen Thanh Huyen (2016), data from the Ministry of Finance, the unit managing independent valuation units, the number of valuation enterprises is not much, in 2014 there were 106 valuation enterprises operating; in 2015 there were only 105 licensed enterprises; in 2016 there were

183 enterprises and nearly 900 appraisers. Every year, enterprises or appraisers operating in the field of valuation must apply for a license to practice asset valuation from the Ministry of Finance. Compared to the volume of assets, especially mortgaged real estate that need to be valued by Vietnamese commercial banks, these are quite small numbers. In addition, the facilities and databases serving valuation activities in general and asset valuation in particular in Vietnam have only recently been established and are not yet complete.

In fact, banks often have asset valuation departments, but in some cases, bank valuation staff are not professionally trained and often self-evaluate assets without professional advice or refer to unofficial sources of information. Therefore, prices are often overestimated or risk factors in business plans are not detected.

Therefore, in the coming time, to improve the effectiveness of collateral valuation to minimize risks for banks, thereby improving credit efficiency, banks need to renew their awareness of collateral valuation, considering the determination of collateral value as a key step for lending and an important tool to minimize risks when handling collateral. Banks also need to build a real estate information system, coordinate with brokerage organizations, market research companies to build a market information database to serve the entire banking system. In addition to the results from valuation organizations, this is an essential database to help banks consider more carefully and clearly before making lending decisions, thereby helping banks limit risks. In addition, to limit risks and comply with international practices, banks need to establish independent valuation companies that separate banking operations, such as assigning tasks to affiliated companies such as asset management and debt exploitation companies (AMCs). At the same time, banks need to coordinate and hire other independent valuation companies to improve objectivity in determining collateral assets to limit risks for banks.

4.2.5. Improve employee salary cost management

Operating costs are also an important factor affecting lending efficiency because the bank's costs are mainly costs for credit activities, the more costs are reduced, the higher the efficiency of credit activities. The problem for each bank is to reduce costs, especially in the current period when banking operations are facing many difficulties due to high bad debts. Staff salary costs are the main cost item in the bank's operating costs, reducing salary and income costs of staff according to the principle of restructuring human resources, thereby increasing sales staff and reducing positions.

Indirect operations serve business activities to increase labor productivity, leaving only qualified personnel to receive high salaries. Currently, in operating costs, salary costs account for over 40%.

With the development of a diversified network of products and services, banks have had a strong growth in the number of employees in recent times. However, ensuring the remuneration policies to attract good employees while reducing costs is a very difficult problem for each bank. Through a survey based on reality and through financial reports of commercial banks in Hanoi, it is shown that the salary expenditure item at each bank often accounts for the largest proportion of operating costs, in terms of salary levels, there are changes between banks, banks with good business operations have employees with higher salaries than weak banks. In 2016, according to data from the annual reports of banks (2016), VCB is still the bank with the highest salary and bonus for employees in the system with an average income of 26.52 million VND. For non-state-owned commercial banks, salaries are also quite good. TCB has the highest average income per employee at 25 million VND, MB is 17.3 million VND.

Thus, managing the cost of bank employees' salaries is a difficult problem. If high salaries are paid, talent will be attracted, thereby increasing labor productivity, but the bank's salary fund will increase and vice versa. Therefore, the effective solution now is that banks need to improve processes, invest in technology to reduce the number of employees and increase labor productivity, especially limiting the number of employees serving non-profitable operations.

4.2.6. Other solutions

4.2.6.1. Improve appraisal and improve lending process

Loan appraisal plays an important role in improving the efficiency of credit activities. Appraisal is the key to handling customer loans. Appraisal as well as good lending process not only solves the needs of customers but also ensures risks for the bank. In appraisal, customers need to pay attention to the following contents:

For the stage of loan application appraisal and customer legality: Banks need to carefully appraise and collect complete information about the loan application, especially the legality of the borrower. Evaluate well the production and business capacity and financial situation of the customer.

Regarding the appraisal of loan plans and projects: This stage can lead to ineffective or poor quality lending activities of the bank, which is caused by the credit officers themselves, especially the appraisal of large plans or investment projects, which is often very complicated and affects the purpose of the loan as well as the effectiveness of the loan later. Credit officers with good professional qualifications and good moral qualities play an important role in bringing about the effectiveness of credit activities. Some situations that lead to effective lending activities can be considered, such as:

- Due to lack of information about the business field of the loan application and project, leading to inadequate information sources, making incorrect lending decisions, causing risks for the bank.

- Originating from inaccurate information provided by customers, when assessing credit officers with poor professional qualifications, collecting poor information causes losses to the bank.

- The moral hazard of bank staff is intentionally distorting the provisions of the law and the State Bank when appraising to make decisions on poor quality loans in order to appropriate bank assets.

- Banks cannot accurately predict what might happen in the future by analyzing current credit conditions.

Therefore, the loan appraiser and the loan decision maker need to be independent to be objective. It is necessary to carefully evaluate the honesty of the loan project plan, check the actual customer to evaluate in detail and scientifically each small item of the loan plan and project, especially plans and projects of a complex nature.

Regarding the collateral appraisal stage: in order to effectively operate the lending, the bank needs to carefully appraise the collateral. Recently, when bad debts broke out, there were many errors in the appraisal and assessment of assets, for example, the increase in the value of diving equipment assets by more than a hundred times of the Leasing Company of the Agricultural and Rural Development Bank 2... Therefore, the appraisal of assets must be accurate and have a strict process. Banks need to separate the appraisal of assets independently. Currently, banks often assign their subsidiaries to independently appraise such as at MB, the valuation is assigned to the debt management and asset exploitation company of the Military Bank... In addition, banks need to hire reputable independent appraisal companies such as the appraisal companies of the Ministry of Finance...

The bank's loan appraisal process usually follows the 3 steps above.

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