Investment Project Appraisal Process in Commercial Bank Lending Activities

The detailed content will be presented in section 1.3.2.2.

Environmental assessment

This is an important content that needs to be carefully assessed. The assessment must comprehensively consider the impacts on the environment, especially the negative impacts. Specifically:

- The effects of changing the ecological environment.

- Environmental pollution, pollution level.

- Treatment measures.

- Results after processing.

Socio-economic assessment

In addition to determining the suitability of the project's objectives for the national economic development direction, the priority order, and the project's impact on the development of other sectors, it is also necessary to examine and compare socio-economic indicators. These indicators include:

- National income added value (The larger this value, the better).

- The ratio of added value/Investment capital in % must reach two digits (> 10%).

- The larger the number of jobs, the better.

- The ratio of budget contribution/investment capital fluctuates quite a lot depending on whether the project is a priority or not.

- Other indicators such as contributing to the development of industries, satisfying people's consumption needs, contributing to local development, the indicators need to state specific numbers if they can be calculated.

b) Appraisal of loan customers (investors)

For customers when borrowing investment capital, commercial banks need to appraise: The customer's legal status; the customer's financial situation; appraisal of assets securing the loan; the customer's ability to repay the debt, and the customer's source of repayment.

Assessing the legal status of loan customers

For investment projects built in association with the formation of a new legal entity, the customer appraisal content includes: The organizational structure of the management apparatus, capital contribution structure, the experience level of each officer holding key positions of the enterprise, is it capable of being in line with the enterprise's expertise?

Customers must be 18 years of age or older, have civil capacity according to the provisions of the Civil Code, have confirmation of relatives as well as identification papers.

Assessing customer financial capacity

Consider the financial capacity of customers through: Balance sheet, business results sheet, in particular, the appraisal officer needs to closely monitor the credit relationship of customers with banks and other credit institutions, analyze and evaluate the debt situation in detail to allow conclusions about the financial potential and debt repayment burden of the enterprise, the serious attitude of the investor in fulfilling obligations to the sponsors. From there, it is possible to see the advantages and difficulties of the investor in fulfilling the debt repayment obligation for the new loan.

Loan collateral appraisal

The appraisal officer checks and examines the loan collateral documents such as: Property ownership certificates, land registration declarations, drawings, Land Use Rights Certificates with copper frames, House Ownership and Land Use Rights Certificates (certified copies) according to the bank's form.

Loan repayment capacity assessment

The appraisal officer examines and evaluates the project's own production and business activities and the business activities of the enterprise with annual results and profits, especially reviewing the balance sheet and business results sheet, whether it is consistent with the debt repayment plan as stated in the loan contract and reviewing other sources of income of the enterprise.

1.3.1.3. Investment project appraisal process in lending activities of commercial banks

Depending on the characteristics of organization and management, each bank designs and builds its own investment project appraisal process. Most commercial banks design their own specific investment project appraisal process, including many different steps with specific results of each step as follows:

Table 1.1: Summary of private project appraisal process  11 

Stages of the process

Sources and providers of information

The bank's role at each stage

Results of each stage

(1)

(2)

(3)

(4)

Prepare application for TD issuance

- Borrower provides information

- Contact, disseminate and guide customers to prepare loan application

- Complete the application form

move to next stage

Project appraisal

- Loan application files from previous stage transferred.

- Additional information from interviews, archives,...

- Organizing financial and non-financial appraisals by individuals or appraisal departments

- Report appraisal results to the competent department for loan decision.

Investment decision

- Documents and information from previous stages are transferred and the appraisal results are reported.

- Additional information

- Decide to grant or deny a loan based on the appraisal results

- Decision to grant or reject a loan depends on the appraisal results.

- Carry out legal procedures such as signing loan contracts, notarized contracts, and other types of contracts.

Maybe you are interested!

Customer project proposal

loan

Receiving documents

client

Collect

information

Consulting with central ministries, branches, specialized departments, and representatives

related method

Drop off at customer location

Credit department

appraisal

Report generation

appraisal

Report generation

appraisal

Credit Council/Association

Board of Directors re-assessment

Director of Commercial Bank

Sign the contract

Competent person

investment decision

Diagram 1.1: General process of appraising investment loan projects  11 

a) Prepare investment project documents to request loans from commercial banks

Preparing a project dossier is an important step because it is the step of collecting information as a basis for performing the following steps, especially the step of analyzing and making lending decisions. In general, a credit application dossier needs to collect the following information from customers:

+ Information on the legal capacity and behavioral capacity of the customer

+ Information on customers' ability to use and repay capital.

+ Information on credit guarantees.

To collect the above basic information, banks often require customers to prepare and submit to the bank the following documents:

a/ Loan application (according to bank form)

b/ Legal documents: (Business registration certificate; Establishment decision; Tax registration certificate (certified copy))

c/ Borrower's profile: (ID card (copy), resume (according to bank's form) of General Director or Director, Project Investor,);

d/ Management and operation records: (Organizational structure (certified copy), Charter/Operating regulations of the unit; Unit representative, Decision on appointment of the board of directors or certificate of business experience)

e/ Financial documents: Balance sheet, cash flow statement for the last 3 years, financial statement explanation, business plan

f/ Business documents: Contracts and other decisions from related parties: (Tender agreements, purchase-sale agreements, service agreements; business-related documents)

g/ Loan collateral documents: Real estate assets: House and land documents

b) Appraisal of investment projects for loans at commercial banks

Loan project appraisal is to assess the current and potential ability of customers to use credit capital. The goal of loan project appraisal is to find situations that may lead to risks for the bank, predict the ability to control those risks and plan preventive measures and limit possible damage. On the other hand, loan project appraisal also focuses on checking the awareness of the loan application provided by the customer, thereby assessing the customer's debt repayment attitude as a basis for lending decisions.

Collect

information

Appraisal

initial

Detailed assessment

Report generation

appraisal

Create a profile

please borrow

Refuse

Decision

loan

Customer submits application

Sign the contract

Release letter to customer

Diagram 1.2: Project appraisal process at commercial banks  15 

This process includes the following contents:

- Pre-loan inspection: Is to check and evaluate the business performance of the enterprise, the core of which is to evaluate the financial performance of the enterprise in need of borrowing capital. This is an important stage in the investment process of the bank, so the bank has established a specialized team to focus on appraisal work, contributing to improving the efficiency of the loan project.

- Check during lending: Check and monitor customer usage

loan capital, timely detection and handling. This stage includes: controlling loan money to pay the right subjects, right purposes, collecting payment documents, using loan capital stored in the loan application.

- Post-loan inspection: During this period, continue to maintain inspection of loan usage, proactively and promptly detect cases of misuse or risk of capital loss to take timely measures. Consider handling arising difficulties and problems, thereby finding appropriate solutions.

To clarify the above concept, we consider the process. It is a continuous process from the time the customer applies for a loan until the end of the credit relationship. We follow the steps as follows:

Step 1: Credit officers contact, guide, and interview customers to complete the application and must check the completeness of the application (Application. Legal documents. Plan/Project), and whether it is consistent with current credit policies and procedures. If the application does not meet the requirements, the customer must be notified to supplement the documents as required by the bank. If the application meets the credit requirements, the credit officer records the application in the monitoring minutes.

Step 2: The head of the credit department and the staff performing the appraisal work collect information through interviews, visits, discussions, and consultations with relevant ministries, central branches, specialized departments, and localities. The staff responsible for appraisal must check and filter the collected information sources to analyze and plan the appraisal, and appraise the detailed investment project such as: appraising the feasibility, analyzing and evaluating the investment project according to the requirements and contents of the investment project appraisal such as: legal aspects, market aspects, technical and technological aspects of the project, organizational aspects, project implementation management, financial aspects, ecological environment, socio-economic aspects, and debt guarantee documents. The person responsible for the appraisal synthesizes the opinions of relevant agencies and units and the results of the appraisal of the basic design of the investment project and makes a record, reports the results of the appraisal of the investment project according to the bank's form, proposes opinions, advantages and disadvantages of the investment project and risks that may occur during the implementation of the investment project activities and submits them to the superior organization (the Credit Council/Re-appraisal Board of Directors) according to the bank's regulations.

Step 3: Credit Council/Board of Directors re-evaluates. The person responsible for appraising the investment project presents and defends the appraisal results, clearly stating the reasons and conclusions on the ability to recover the loan, advantages and disadvantages. The members in the meeting propose opinions, the meeting chair summarizes the opinions and appraisal results, the meeting secretary is responsible for making minutes, reporting to the competent person to review and approve the investment or not.

Step 4: The investment project appraisal report is sent to the competent authority for investment decision review, and whether to approve the investment or not. Sign the decision and send it to the subordinates according to the steps.

Step 5: The credit department issues a notice letter to the customer:

- If the loan is not granted, the detailed reason for refusal must be clearly stated to the customer.

- When notified of loan approval, customers can renegotiate the loan such as: Term, interest rate, lending method, collateral.

1.3.2. Financial appraisal of investment projects in lending activities of commercial banks

1.3.2.1. Concept of financial appraisal of investment projects

From the above analysis, financial appraisal of investment projects is one of the four contents of the general appraisal work performed by commercial banks when deciding to lend capital. There are many different views on financial appraisal of investment projects.

For example:

Source

Research results

WB 1

 Is the process by which the Bank reviews whether a project achieves its objectives.

financial goals that the Bank has set or not so that the Bank can make the most optimal investment decision.

Rotberg H 2

 Is the review, analysis and evaluation of investment projects from a financial perspective to help make effective investment decisions for the Bank.

row.

Cong Tuan 3

 Is a project preparation activity carried out using financial analysis techniques established by the Bank to make decisions.

right investment decision

LumpyStephen 4

 Is to assess factors affecting the financial performance of the project.

project to make optimal investment decisions

Little MD 5

 Is to assess the financial feasibility of the project and loan needs.

project capital as well as the project's ability to repay debt and interest.

1 The World Bank (1976), A Project financial appraisal

2 Rotberg, Eugene H (1986 ), Finance and Development (pg. 36)