Introduction to Groups of Indicators for Evaluating the Development of Tctc's Activities

APPENDIX 1.3. INTRODUCTION TO GROUPS OF INDICATORS TO ASSESS THE DEVELOPMENT OF TCTC'S ACTIVITIES

There are many groups of indicators reflecting the development of TCTCNT activities such as CAMELS, PEARLS, and groups of indicators on access and sustainability.

In addition, a number of other indicators are also used such as the size and quality of outstanding loans, asset and loan management, operating efficiency and operating effectiveness.

The following is an introduction to the PEARLS and CAMELS indicator groups.

A. PEARLS

PEARLS is a system of 44 financial indicators widely used worldwide by the World Commission on Credit Unions (WOCCU) to monitor credit activities. It was originated and applied in the late 1980s, at the Guatemalan credit union.

Components of the PEARL system

1. Protection indicators

P = PROTECTION INDICATORS

Standard levels
P1	Provision for credit risk/overdue loans> 12 months	100%
P2	Credit Risk Provision/Net 1-12 Month Overdue Loans	35%
P3	Total loans overdue > 12 months written off	100%
P4	Total annual debt write-offs/Average outstanding debt	Minimum
P5	Cumulative Loan Recoveries/Total Debt Written Off cumulative	100%
P6	Liquidity ratio (net asset value/Total capital and cash) send)	>=110%

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2. Effective Financial Structure

E= EFFICIENT FINANCIAL STRUCTURE

Standard level
E1	Net Loans/Total Assets	70%-80%
E2	Highly Liquid Investments/Total Assets	Up to 20%
E3	Financial Investment/Total Assets	Up to 10%
E4	Non-financial Investments/Total Assets	0%
E5	Savings Deposits/Total Assets	70%-80%
E6	Third Party Debt/Total Assets	Up to 5%
E7	Shareholders' Equity / Total Assets	10-20%
E8	Equity / Total Assets	Minimum 10%
E9	Net Institutional Capital / Total Assets	Like E8

3. Asset quality

A = Asset Quality

Standard level
A1	Total overdue loans/ Total loan portfolio value	<=5%
A2	Non-performing assets	<= 5%
A3	Non-cost capital (Net capital of the organization and convertible capital + Non-interest bearing liabilities)/Non-producing assets word	>200%

4. Rate of return on investment and cost

R = Rate of return

Standard level
R1	Net lending income/average net loan portfolio balance	Full interest rate
R2	Total income from short-term investments / Average balance of short-term investments	Market interest rate
R3	Total income from financial investments/Number average balance of financial investments	Market interest rate
R4	Total income from non-financial investments/ Average balance of non-financial investments	>R1
R5	Total savings interest expense/Average balance savings deposit	Market interest rate >inflation rate
R6	Total Third Party Loan Cost/Average Balance loan	Market interest rate
R7	Total Dividends/Average Equity	Market interest rate >=R5
R8	Gross profit/Average total assets	Fluctuation, Dependent belong to R9,R11,R12
R9	Total operating expenses/Average total asset balance army	5%
R10	Total credit loss provision expense/ Average total asset balance	Depends on the loan late payment
R11	Unusual income or expense/ Total balance average product	Lowest level
R12	Net Income / Average Total Assets	E9 Dependent

5. Liquidity

L = Liquidity

Standard level
L1	Short-term Investments + Easily Convertible Assets - Short-term Payables/ Savings Deposits	Lowest is 15%

L2	Liquidity Reserves / Savings Deposits	10%
L3	Non-performing liquid assets/Total value asset value	<1%

6. Signs of growth

S=Growth Sign

Standard level
S1	Customer loan portfolio growth	Depends on E1
S2	Growth of liquid investments High	Depends on E2
S3	Growth of financial investments	Depends on E3
S4	Growth in non-financial investments	Depends on E4
S5	Growth in savings deposits	Depends on E5
S6	Increase in third party debt	Depends on E6
S7	Increase equity capital	Depends on E7
S8	Institutional Capital Increase	Depends on E8
S9	Increase in net capital of the organization	Depends on E9
S10	Increase the number of customer members	>12%
S11	Total asset value growth	>Inflation rate

B. CAMEL (or extended CAMEL - CAMEL HIS)

The CAMEL system analyzes five traditional aspects considered to be the most important in the operation of a financial intermediary. The five areas reflect the financial conditions and overall performance of a financial institution, described as follows:

1. C (capital) - Self-balancing capacity : This is the equity of the credit institution and the ability of the credit institution to meet the increasingly expanding loans as well as the potential asset development orientations that the credit institution needs to achieve. The CAMEL analysis system considers the ability of the credit institution to mobilize additional equity in case of losses and the ability and policy to establish reserves in case of operational risks.

Indicators used to analyze capital

- Capital structure, focusing on the relative importance of tier 1 and tier 2 capital: Tier 2 capital is maximum 100% of tier 1 capital

- The quality of shareholders has great influence

- Comply with regulations on minimum capital required

- Comply with regulations on appropriate liquidity/capital ratio

- Quality and financial capacity of shareholders

- Shareholders' participation in the board of directors and voting rights

- Expected changes in capital structure

- Capital reserve index = Actual capital loss reserve/Capital loss reserve adjusted according to CAMEL

2. A (assets) - Asset quality . The overall quality of loans and other assets, including infrastructure loans. This requires consideration of the adequacy of loan classification systems, information collection processes and write-off policies.

Focus on cash and credit

• Cash:

+ Forecast cash inflows and outflows due to disbursement and payment of loans and deposits

deposit withdrawal

+ Measures to ensure money storage and transportation

3. M (management) – Management : Human resource management policies, general management policies of the organization, information systems, internal control and audit regimes, strategic plans and budgets are all considered separately to reflect the overall quality of management activities.

Analyze personnel and work style

- Board of Directors

- Management

- The relationship between the two sides

4. E (earning) – Profit : This is an important factor in the analysis of revenue and costs, including the efficiency of operations and interest rate policies as well as overall operating results measured by indicators.

Analyze the ability to generate sufficient income to cover expenses and sustainably grow capital

• Usage criteria

- Indicators of financial sustainability

- Performance indicators

- Indicators of loan portfolio quality.

• Indicators of financial sustainability

Return on assets = Net income/Average total assets

cost of capital ratio = (loan interest + deposit interest)/ average total assets

Gross financial profit = (financial income - financial expenses)/ average total assets

operating cost index = operating expenses/average total assets

Operating Self-Reliance Index OSS= Total Financial Income/Total Financial Expenses

Financial Self-Sufficiency Index FSS = Total Financial Income/(Total Financial Expenses + Capital Expenses + Operating Expenses + Risk Provisions)

• Performance indicators

Cost per loan unit = operating cost/Amount disbursed during the period

Cost per loan = operating expenses/number of new loans in the period

Number of customers borrowing per credit officer.

• Indicators of loan portfolio quality.

Credit risk provision ratio

Loan Portfolio at Risk

Loss rate.

• Warning signs

Profits decrease, or losses arise

Unusual increase in profits through transactions such as asset liquidation, securities trading, currency trading...

5. L (liquidity) – liquidity : This is a factor used when analyzing the organization's ability to determine the need for project financing in general as well as the need for loan capital in particular. The organization's debt and equity structure, the ability to pay short-term assets are also very important factors in assessing the organization's overall ability to manage liquidity.

Current asset utilization = (1-interest income in the form of cash and quasi-cash)/[(average monthly cash + quasi-cash – liquidity reserves) * Interest rate applicable to 6-month term deposit certificates] + (liquidity reserves * Average savings interest rate)

• Liquidity:

 Debt level and debt payment obligations

 Deposit and withdrawal fluctuations

 Accounts Payable

 Provisions

 Contingent liabilities (off-balance sheet accounts)

• Early warning signs:

 Increasing reliance on bank debt, especially at higher interest rates

 Customers deposit and withdraw a lot

 Liquidity ratio decreased

 Increase in late or uncollectible payments

HIS EXPANDED ITEMS

a. Human resources

• Recruitment and benefits policy

• Clear division of responsibilities and work

• Work results are evaluated and rewarded

• Warning

- Staff have no motivation to work

- There are many complaints from employees.

b. Internal Control

- Necessary procedures in lending and debt collection, especially the two-signature system

- Accuracy in recording revenue and expenses

- Necessary safety measures in currency management and storage

- Completeness of control and inspection procedures

- Frequency and schedule of site inspections

• Warning signs

- Poor quality of control staff

- Unclear policies, easily confusing

- Senior leadership intervention

- Field inspections are sparse and overlooked

c. Systems

Systems (accounting and MIS)

• Accounting system

- Record transactions promptly and accurately

- Frequency and severity of recording errors

• MIS

- Degree of computerization and manualism

- Information collection and management process

- Check the accuracy, relevance and convenience of reports from MIS

The three basic differences between the PEARLS and CAMELS systems are:

 PEARLS mainly uses quantitative indicators while CAMEL uses both quantitative and qualitative indicators, such as Management. PEARLS provides an objective assessment of financial performance by reviewing the results of quantitative indicators.

 PEARLS evaluates the financial structure of the balance sheet. Financial structure has a direct impact on the efficiency and profitability of a financial institution because the more an institution maximizes its earning assets, the more income it is able to generate.

 PEARLS measures growth rates. Monitoring growth in different areas not only allows organizations to assess customer satisfaction, but also helps managers maintain an efficient financial structure since growth directly affects financial structure.

APPENDIX 2.1. SOCIO-ECONOMIC CONTEXT INFLUENCING ACTIVITIES

ACTION OF VIETNAMESE INDUSTRIES

Vietnam is one of the fastest growing economies in the world, and this trend is expected to continue in 2007 and beyond. Vietnam's GDP grew at an average rate of 7.5% during 2001-2005 and 8.2% in 2006 [Vietnam Economic Times 1/2007]. The Government's commitment to economic liberalization and international integration, remarkable developments, and incremental reforms to modernize the economy helped Vietnam become an official member of the WTO in 2006. However, Vietnam remains a less developed country, with 76% of the population and 85% of the poor living in rural areas [WB, 2006a, p. 17].

Since the implementation of the renovation in 1986, Vietnam has achieved many impressive results in agricultural and rural development and poverty reduction. In 1986, the Vietnamese Government decided to implement a national policy of poverty reduction through promoting the production activities of the poor. With the achievements, Vietnam is considered one of the countries that has most successfully implemented the goal of poverty reduction with the poverty rate reduced by nearly half, from 58% in 1993 to 29% in 2002 [Dan Zook, 2005, p. 3] and 24% in 2005 according to United Nations standards. In addition, the average income per capita has grown by an average of 7.3% per year over the past ten years.

Vietnam's development experience has been disseminated by the World Bank to the world through its website www.worldbank.org since February 14, 2007 in seven different languages. "There is probably no country in the world that has developed as fast and as strongly in the past 15 years," said Klaus Rohland, former World Bank Country Director for Vietnam, in an interview posted online. "Vietnam has developed from a country that had to import food to become the second largest rice exporter in the world." In the World Bank's strategy for Vietnam, Vietnam's success in development, poverty reduction and economic growth is described as "spectacular."

The main factors in this impressive development are the rapid modernization of agriculture and the sustainable development of rural areas as well as the resolution of social problems in rural areas, especially poverty reduction. Investments and restructuring within the framework of the main agricultural sector have increased the employment rate of the rural population from 77.66% in 2003 to 79.1% in 2006, reducing unemployment to 1.1% [State Bank of Vietnam, 2005, p.], [IMF, 2006, PRSP February]. Agricultural diversification has been receiving

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