Overdue Debt and Overdue Debt Ratio in 2006 and 2007 at VCB Hanoi

Short term Medium term

Outstanding loans by term

1200000

1000000

800000

600000

400000

200000

Year 2005

2006

The figure of 1,347 billion VND in loans to SMEs and SMEs of VCB Hanoi has shown the growth in volume of lending activities (growth of more than 10% compared to 2005). In which, short-term loans still promote the tradition with a higher growth rate than medium-term loans (16.1% of short-term compared to about 5.6% of medium-term). This also clearly reveals the weakness of commercial banks in general and VCB Hanoi in particular in the ability to recognize and manage medium-term credit risks. For this reason, improving the quality of lending is increasingly considered an urgent issue.

*About overdue debt and overdue debt ratio:

These are two important indicators to evaluate the quality of loans for businesses, especially the overdue debt ratio:

Overdue debt ratio = (Overdue debt / Total outstanding debt) * 100 %

The higher the overdue debt ratio, the less effective the bank's management, appraisal and operation.

Table 2.2.2.7: Overdue debt and overdue debt ratio in 2006 and 2007 at VCB Hanoi

Target

2006

2007

DNV&N

Ingredient

other economy

DNV&N

Ingredient

other economy

1.Total outstanding debt

1,213,817

2,942,747

1,343,867

2,841,243.5

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49,023

96,530

61,059

94,822.15

3. Debt ratio

Overdue ( % )

4.04

3.25

4.5

3.35

2. Overdue debt

(Source: Credit report of VCB Hanoi)

Chart 2.2.2.5: Overdue debt ratio in 2006 and 2007

Overdue debt ratio

Proportion

4.5

3.5

1.5

0.5

DNV&N

Other KT components

2006

2007

Looking at the data table and chart, it is clear that the overdue debt ratio of DNV & N of VCB Hanoi is much higher than that of other sectors in the economy. While other enterprises always have a bad debt ratio of only 3-3.5%, DNV & N has a consistently high bad debt ratio of over 4%. Although there are certain disadvantages such as lack of capital, outdated technology, and low-skilled labor, the figure of over 4% bad debt still reflects the branch's lax management of capital sources for DNV & N.

Table 2.2.2.8: Outstanding debt and overdue debt ratio (converted to VND) by term of VCB Hanoi 2007

(Unit: billion VND, %)

Outstanding debt (billion VND)	Overdue debt rate (%)
Short term loans	3035	2.8
Medium term loans	455.6	2.04
Long term loans	546	1.8
Total	4062.7	2.47

Target

Short term loans Medium term loans Long term loans

Total

Overdue debt ratio 2007

2.5

1.5

0.5

Overdue debt

In 2007, at the Hanoi Commercial Bank, the total outstanding debt at the end of the year was 4,062.6 billion VND, the overdue debt ratio was 2.46%, down 0.28% compared to 2006 (2.74%). Of which, short-term was the highest at 2.8%, followed by medium-term at 2.03% and the lowest was long-term at 1.9%. Short-term overdue debt mostly arose from state-owned enterprises, while medium- and long-term were from loans from non-state-owned enterprises. This phenomenon originated from the fact that state-owned enterprises mainly borrowed capital for short-term purposes, but their business operations did not bring positive results.

2.3. Assessment of the current status of lending quality for SMEs and SMEs of VCB HN.

Results achieved:

In the process of the country's transformation towards the goal of developing a strong socialist-oriented market economy, the competition between banks and enterprises is very fierce. VCB Hanoi has also made significant improvements in innovating production and business activities to meet the tasks of the new situation. The strategy of expanding the lending market share in Hanoi has been clearly set out by the leadership. In addition to lending to large enterprises, SMEs are also one of the extremely important subjects to help the branch achieve the set goals. At the same time, combined with the development encouragement policy of the Party and the Government, VCB Hanoi is self-improving and improving its management capacity to meet the goal of improving the credit quality of the entire branch. From 2004 to 2007, the improvement of lending quality for SMEs at VCB Hanoi has achieved the following encouraging results:

- Regarding sales and outstanding loans: Business activities of all enterprises never do not need capital, especially for SMEs & N. Taking advantage of the advantages of a large bank, VCB Hanoi has been trying to best meet the capital needs to expand production and business of SMEs & N. Lending to effective projects not only helps enterprises take advantage of business opportunities but also brings the Branch a significant source of profit. With a total outstanding loan balance for small and medium enterprises of more than 1,000 billion, it has shown quite impressive results of the Branch. However, the Branch still has a problem with bad debt with a bad debt ratio of up to 4.5% for 2007. This has more or less affected the lending quality of the entire branch as well as the entire NT Vietnam Joint Stock Commercial Bank system.

- Regarding customer objects : loan objects for SMEs & N are stipulated in the lending regulations of NT Commercial Joint Stock Bank and VCB Hanoi, also based on the actual situation and capital needs of enterprises to conduct loans to many types of enterprises, such as SMEs & N under state management, joint stock companies, limited liability companies and other types of enterprises. The expanded customer objects mean that systemic risks will increase, which has put pressure to promote the need to improve the quality of lending to branches.

- Regarding loan term : up to now, short-term credit still accounts for the largest proportion in the credit structure of the Branch. However, with the orientation of improving the quality of risk management and enhancing credit quality, in the future, the Branch will continue to promote the consideration of medium and long-term projects to meet the capital needs of enterprises as well as develop the production and business activities of the Branch.

- Regarding loan structure and loan quality : The Hanoi Branch of the State Bank of Vietnam has made appropriate innovations associated with the country's economic development, lending according to projects for large companies operating in important sectors of the economy, bringing development to businesses as well as contributing to economic restructuring. Short-term loans always account for the largest proportion and quantity, but medium and long-term loans and loans to small and medium-sized non-state enterprises are increasingly improved. In addition, the branch also pays great attention to ensuring loan quality, minimizing newly arising overdue debts, and for overdue debts of the previous year, the branch has actively applied many measures to handle capital recovery, reduce debt, and reduce overdue interest rates for businesses facing difficulties but capable of paying off overdue debts. In addition, for customers who are slow to pay and do not want to pay their debts, the branch also has strict measures with the debt settlement department to recover capital, contributing to limiting losses for the branch, improving the financial situation, enhancing the position and reputation of the branch in the market. Although the rate of overdue debt for small and medium enterprises is still high, it is lower than the rate of overdue debt of the entire branch. To achieve the above achievements, first of all, we must mention the wise leadership of the Board of Directors and Executive Board of Hanoi Commercial Joint Stock Bank.

- Regarding loan security and debt collection: Currently, Hanoi Branch is applying the method of valuing collateral assets according to the regulations of the Foreign Trade Bank, which means that according to this regulation, collateral assets are valued more appropriately with the market value at the time of valuation, and higher than the State's regulations on collateral assets. This has created favorable conditions for SMEs & N to access capital sources to serve production and business activities. However, the work

This also carries many risks, especially disadvantages when the market value of the collateral falls due to adverse factors.

- Regarding customer service: VCB Hanoi has inherited and continued to promote the Vietcombank culture that has been established for a long time, combined with increasingly strong marketing activities, which is an advantage of the Branch compared to other banks in the same Hanoi area. However, there are still some existing problems that require the branch's leadership to come up with specific solutions to overcome, moving towards the best service for customers.

2.3.2. Limitations and causes

2.3.2.1. Limitations

- Regarding outstanding loans and loan turnover : In general, sales and outstanding loans have increased steadily over the years, however, the quality of loans is still a problem as there are continuous changes, especially the upward trend in recent years. The proportion of short-term loans is quite high, but these loans also come with great risks, forcing the Branch to continue to strengthen risk management and ensure credit quality.

- Regarding the scale of lending capital: VCB Hanoi Branch has a great geographical advantage when located in a capital with a very strong economic development, however, the branch has not yet promoted that advantage. This is reflected in the number of enterprises with which the branch has credit relations as of 2007, which is still under 1,000 enterprises with a total outstanding debt of only about 1,000 billion VND.

- Regarding loan terms: currently, the Branch still maintains the majority of short-term loans in the loan structure. Medium and long-term loans with high profit expectations have not been focused on. Therefore, improving credit quality, risk management and control must be seriously considered to take full advantage of the Branch.

- Regarding credit quality in general: The overdue debt and bad debt ratio of the SME sector is increasing in the total overdue debt of the entire branch. This shows that the branch still has some limitations in the process of assessing the feasibility of the project as well as managing credit risks. In addition, SMEs are facing difficulties.

in production and business. To overcome this limitation, it requires efforts from both businesses in production and business activities and from banks in debt collection, and at the same time, there needs to be specific advice and measures to help their customers.

2.3.2.2 Causes

To overcome the above limitations, it is necessary to find the following basic causes:

* Cause from the bank

- Taking appraisal work lightly: Credit officers are the ones who directly appraise and evaluate the feasibility of production and business plans as well as customer information. However, currently at the Hanoi branch, the credit officers have the advantage of being very young but have little experience in appraising loans. The information analyzed and processed is mainly from customers, so it cannot ensure objectivity and honesty. This can lead to incorrect conclusions, affecting the quality of loans.

- The branch does not have complete and accurate information about the customer: Collecting information about the customer before appraising the investment project and signing the contract is extremely important, it determines the nature, structure and content of the credit contract. If the collected information is inaccurate or not reliable enough or distorted, the bank will certainly not be able to analyze and grasp all the risks to its loan, thereby leading to bad debt or the possibility of losing the loan.

- The internal inspection work of the branch has not achieved good results: Internal inspection and control are not conducted regularly and are often just formalities. Therefore, it is impossible to promptly detect violations in the lending process, leading to sometimes unforeseen consequences.

- Overdue debt collection and risk handling: in difficult economic years, the operations of banks also have more potential risks, leading to the emergence of bad debts and debt collection becoming increasingly urgent for Vietcombank in general and the Hanoi branch in particular. Debt collection has been urged but there is still a situation

Some credit officers still do not pay attention to reviewing and handling debt collection, thereby reducing the business efficiency of the Branch.

- The lending mechanism still has many shortcomings: The current lending mechanism still has many shortcomings, especially the issue of loan security. Because Vietcombank has just been transformed from a state-owned enterprise to a joint-stock commercial bank, the regulations on loan security also need to be amended accordingly to suit the reality. Regarding the current lending procedures, although they have been reduced, they still do not meet the needs of customers.

* Cause from customer side.

- Customers who are not eligible for bank loans: Some customers who are qualified as potential customers, but do not meet the lending standards as prescribed, often circumvent the law by falsifying loan applications, possibly changing their equity, collateral value, and project feasibility. In general, in these situations, if the credit officer has little experience or poor expertise, it will damage the bank's credit quality.

- The management capacity of business owners is still limited: the number of SMEs managers do not have professional qualifications, mainly operating based on experience. This leads to losses and losses in business, affecting the ability to repay debts to banks. SMEs have a common situation of lacking capital, the ability to access credit capital from banks is still difficult in building a feasible business plan and mortgage assets. Some SMEs when building a business plan do not take into account all fluctuations in the commodity market or in the process of technical appraisal when purchasing new technology lines is still weak, so when producing products, it is difficult for the market to accept. Because of this, the production and business activities of enterprises are less effective, reducing the competitiveness of enterprises in the market, leading to a situation of business losses, inability to repay debts to banks.

- The situation of mutual capital appropriation between enterprises is common, causing the financial capacity of enterprises to decrease, significantly affecting the plans and debt repayment ability of enterprises. In the current market economy, with the limitations of enterprises in competition and product consumption, enterprises often have to

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