Overview of Credit Management of Commercial Banks

in the macro environment. And also because of the risk trade-off in credit, low risk is paid for by lower interest rates than medium and long-term credit.

+ Type two: medium and long term credit

Medium and long-term credit is a type of credit with a long-term repayment period - usually over a year, used to provide capital for long-term investment objects, such as building new enterprises, infrastructure projects, roads, ports, airports, etc., large-scale expansion and improvement. In general, medium and long-term credit is invested to form fixed assets. Due to the long duration and large amount of loan capital, the risk is quite high, considering both individual risks and systemic risks.

Second, the role of commercial bank credit in the economy

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Credit is a lever that contributes to economic growth and regulates the economy.

Economic growth is not possible if the required investment rate is not at the corresponding level. For Laos and many countries with less developed economies, achieving the investment rate is currently a major obstacle. In countries with a growth rate of 7% - 8%/year, the investment rate is 30% of the total GDP. Thus, to achieve a growth rate of 1%/year, the investment rate must be 4% of the total GDP. The ratio of GDP investment to GDP growth is called the “incremental capital output ratio” (ICOR).

- TDNH contributes to reducing idle money coefficient and improving capital usage efficiency in all economic sectors through "borrowing to lend".

- TDNH is also an important economic lever promoting the expansion of international economic exchanges.

- TDNH also actively contributes to the formation and development of capital of joint stock companies.

- Through credit activities, banks change the production and business conditions of economic entities in an optimal direction, contributing to shortening the money circulation cycle and increasing the turnover of money.

- TDNH contributes to combating monetary inflation.

Credit is the driving force contributing to the formation and transformation of economic structure towards industrialization and modernization.

- As a bridge between savings and investment, credit becomes a driving force to stimulate economic organizations, enterprises and residents in all economic sectors to save, promote the process of accumulation and concentration of temporarily unused monetary capital currently scattered everywhere, and conduct lending investment to form the economic structure in Laos.

- The State can concentrate credit capital through banks to invest in agricultural development, through industrialization and modernization, transforming backward, self-sufficient agriculture into commodity agriculture based on modern facilities.

- Through the basic principle of credit is lending on the basis of capital repayment and interest so that enterprises, economic sectors, economic regions and economic components can use capital effectively, avoiding loss of investment capital in the process of economic restructuring of our country.

Contribute to financing the reproduction, expansion and enhancement of fixed assets.

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In small-scale production conditions, when capital financing channels for the economy such as

While budget and self-accumulated capital still have certain limitations, medium and long-term bank credit for enterprises also has the meaning of nurturing the credit market for banks to expand short-term credit and other banking services.

The demand for medium and long-term credit in reality mainly comes from corporate customers. They establish credit relationships with banks in this form to carry out in-depth investment activities or expand production and business capabilities through investment in fixed assets. For enterprises, fixed assets are the main means of production, accounting for a large part of the total cost, and are an important factor in determining competitive advantage... Therefore, paying attention to fixed assets is very necessary, a pressure on the existence and development of an enterprise.

However, in reality, the value of fixed assets is often high, requiring businesses to accumulate over a fairly long period of time to have sufficient financial capacity. The difficulty of this temporary shortage of fixed capital of businesses can be financed by other sources of capital, but medium and long-term credit is one of the best sources of capital.

Through medium and long-term credit, commercial banks have helped enterprises expand their production and business facilities, purchase machinery and equipment, etc., increase output value, equip new facilities with modern features, improve product quality and labor productivity, etc., making an important contribution to helping enterprises achieve their business goals: profit, safety and continuous development.

Creating conditions for the application of scientific and technological advances

Nowadays, when science and technology have achieved brilliant achievements, especially achievements in applied sciences, it has created opportunities and also challenges for the existence and development of an economic organization in the market.

Although this application is necessary, all enterprises face a major obstacle, which is the huge initial cost, which the enterprise's own capital cannot meet. In that situation, commercial banks, especially medium and long-term credit, have had positive supporting impacts in applying scientific and technological advances to production and business activities. From there, enterprises have continuously improved their position in the market, their efficiency - thereby improving the quality of credit activities of commercial banks.

Contribute to promoting enterprises to improve capital efficiency

During the loan term, the bank performs the function of monitoring the use of capital as the owner of the loan capital for enterprises. The bank, based on credit principles, guides enterprises to use capital for the right purpose effectively, and urges enterprises to borrow capital to repay principal and interest on time as agreed in the credit contract. Unlike equity capital, which does not have to pay capital costs, bank loans are subject to binding conditions on interest rates, terms and purposes of using the loan, so enterprises borrowing capital must have reasonable calculations of production costs, fast capital turnover speed... to ensure timely repayment of bank loans and profits.

On the other hand, in the process of checking and monitoring the use of loans, banks will help enterprises detect weaknesses and errors, thereby taking timely remedial measures to limit possible risks to enterprises as well as related risks to commercial banks.

It can be said that, TDNH has bound the responsibility between the lender and the loan user, thereby improving the capital management capacity and the production-business process, helping to improve the efficiency of capital use.

TDNH is a tool to promote business accounting regime, strengthen financial management, and increase accumulation for enterprises.

Borrowers always consider the efficiency of the loan with the term and interest rate of the loan and they only borrow when calculating the profit, that is the nature of economic accounting. On the bank's side, before lending, they also require customers to satisfy many conditions regarding the financial situation as well as the quality of financial reports. That forces businesses to strengthen business accounting, financial management and capital accumulation...

TDNH provides capital to contribute to economic development investment

Due to the characteristics of capital circulation, in the production and business process of enterprises, there is always a mismatch in time and volume between the amount of money needed to reserve materials and goods for the next production and business process and the amount of money collected from the consumption of goods in the previous production and business cycle. Therefore, the cash circulation of enterprises is sometimes surplus, sometimes deficient. The temporarily idle capital of enterprises, together with savings from the population, surplus from the budget... are mobilized and used by commercial banks to invest in enterprises that are temporarily short of capital, for consumption needs that temporarily exceed people's income, as well as for the spending requirements of the state budget while there is no revenue... Thus, commercial banks have contributed to effectively regulating capital throughout the entire economy.

TDNH promotes the process of accumulation and concentration of production.

By focusing and prioritizing capital for key economic sectors, which are places with extremely large capital needs, TDNH contributes to enhancing the strength and competitiveness of the economy, creating conditions for developing economic relations with foreign countries...

TDNH promotes the circulation of goods and money.

Normally, enterprises only use bank capital after mobilizing all their own resources, which also means that without bank credit, enterprises will hardly be able to realize their business investment opportunities, especially in the market mechanism, if they miss the opportunity, it will significantly affect the business's profit opportunities. In addition, bank credit helps enterprises increase their financial capacity and thus create the ability to increase their competitive strength, rise to survive and develop in the market.

The State Bank is a tool used by the state to regulate the amount of money circulating in the economy.

As we know, with a system of commercial banks, when commercial banks provide credit to the economy, along with the ability to "create money", the "currency" will be multiplied, that is, it has created a money supply capacity, increasing the amount of value in circulation; and the opposite effect will occur when commercial banks reduce credit. From this ability, commercial banks have been used by the State as a tool to regulate the amount of money in circulation through the monetary policy tools of the State Bank such as: required reserves, credit limits, discount rates, open market operations...

TDNH contributes to promoting increased savings and expanding investment in the economy.

TDNH is a tool to help the State implement monetary policy well, and at the same time help banks have a good business environment. With stable purchasing power of money, it will create peace of mind for the people, thereby mobilizing the maximum potential capital sources in society, satisfying the highest demand for capital to expand investment of the economy.

2.2. Overview of credit management of commercial banks

2.2.1. Concept and characteristics of credit management of commercial banks

Credit activities, in which lending activities are the basic and traditional activities of banks, are closely linked to the history of the establishment of banks. The proportion of credit activities always accounts for a large proportion in the entire activities of banks. Credit activities are the activities that bring the main and main source of income for banks, and this is also the activity that brings a lot of risks to banks. Therefore, credit management is of particular importance to banks.

Credit management of any commercial bank must first aim at the existence and sustainable and safe development, and enhance the competitiveness of that commercial bank itself. Therefore, the two basic overarching goals in credit management that commercial banks must achieve are:

One is sustainable profit growth.

This is the primary goal that credit management of commercial banks must aim for. In a market mechanism, to survive, businesses must cover all costs and accumulate profits to expand their business and create competitive advantages. However, for joint stock commercial banks, the pressure on profits is even greater because of the interests of shareholders, because of the price of shares on the stock market or on the OTC market. Commercial banks in general and joint stock commercial banks in particular must operate profitably, with profits increasing and increasing steadily, so that dividends per share are increasingly high. Meanwhile, credit activities are still the most profitable business of commercial banks. Moreover, we are building a socialist-oriented market economy, so commercial banks need to pursue a reasonable profit policy.

Second, link market share development with credit control and risk limitation.

To survive in a market economy, one must compete. To compete in credit activities, one must expand investment and develop market share. But expanding investment without control will not recover investment capital, leading to loss.

loss and further bankruptcy. Risk in credit activities is the fundamental risk that leads to the collapse of many commercial banks.

The above two goals have a dialectical relationship with each other. Successfully achieving the second goal is the basis for completing the first goal; the first goal is the orientation for achieving the second goal. The dialectical nature is also shown in the fact that the two goals are contradictory. A commercial bank that emphasizes the profit goal will apply high interest rates for loans and pursue risky investment projects; thus, it often leads to low safety and vice versa.

With the role of "serving and contributing to promoting economic development", credit management of commercial banks must aim at the following goals: promoting economic restructuring towards industrialization and modernization; supporting capital for households and production and business enterprises to rapidly develop production of goods and services, contributing to sustainable economic growth.

Credit investments always entail the mobilization of resources and human resources for a specific goal, thereby bringing specific benefits to the bank and society, which sometimes may conflict with each other. Therefore, credit management of commercial banks must be linked to the economic and social development goals of the state and each locality. Good credit management must ensure that a credit is issued for the purpose of economic development, meeting the long-term development strategy of the economy. In other words, credit management must ensure that credit investments achieve the goal of healthy economic development.

The functions of credit management also include: planning, leading, organizing, inspecting and controlling credit activities of commercial banks.

2.2.2. Basic content of credit management of commercial banks

2.2.2.1. Management of commercial bank loan capital

When studying credit management, researchers often do not consider capital policy as a component of credit management . However, reality shows that when studying credit management of commercial banks, it is necessary to consider capital policy as a basic content of credit management, because:

In terms of theory, the term Credit comes from the Latin word Credo, meaning "trust, credit". From that, it can be seen that the credit activities of credit institutions in a broad sense are the use of their prestige to mobilize idle capital sources in the economy and use it to provide credit to those who need to borrow capital and are trusted by banks. In other words, capital mobilization is a part of credit activities, in which capital mobilization policy is a basic content of credit management.

On the other hand, credit management of commercial banks for economic development is a system of measures related to expanding or narrowing the credit scale. To expand the credit scale, it is necessary to increase capital mobilization for lending. To narrow the credit scale, it is necessary to reduce capital mobilization to avoid losses due to having to pay interest on excess mobilized capital. This means that capital mobilization activities are closely linked to credit granting activities in credit management of commercial banks.

In practice, commercial banks must be proactive in mobilizing capital in the market to be proactive in lending activities, especially in managing liquidity risks. Commercial banks often have to mobilize capital from other channels and areas to provide credit to economic sectors and areas of operation where they need to expand credit to that area. Therefore, if capital mobilization policy is not considered a component of credit management of commercial banks, credit management will be one-sided and not highly enforceable.

Capital is a necessary and indispensable condition for the production and business process of all economic entities. To develop the economy, the prerequisite is to have capital: "The scale of production capital is the key to economic development". Therefore, investing capital for customers plays a very important role. Credit activities of commercial banks are activities using the "capital" they manage to lend to customers, capital is of special importance. All investment, lending and guarantee activities will not be carried out if the operating capital is exhausted. The operating capital of banks includes equity capital, mobilized capital and borrowed capital.

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