Solutions to improve lending quality for small and medium enterprises at Vietnam Joint Stock Commercial Bank for Industry and Trade - North Hanoi Branch

MINISTRY OF EDUCATION AND TRAINING

THANG LONG UNIVERSITY

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GRADUATION THESIS

TOPIC:

SOLUTIONS TO IMPROVE LOAN QUALITY FOR SMALL AND MEDIUM ENTERPRISES AT BANKS

VIETNAM JOINT STOCK COMMERCIAL BANK OF INDUSTRY AND TRADE - NORTH HANOI BRANCH

Instructor: MSc. Nguyen Phuong Mai Student: Do Thi Minh Thuy

Student code: A17767

Major: Finance-Banking

HANOI - 2013

ACKNOWLEDGEMENTS

To successfully complete this thesis, I would like to express my sincere thanks to Ms. Nguyen Phuong Mai, who has directly guided me very enthusiastically and thoughtfully throughout the process of writing this thesis. At the same time, I would also like to sincerely thank the teachers in the economics department and the officers and employees of the credit department of the Vietnam Joint Stock Commercial Bank for Industry and Trade, North Hanoi Branch for giving me the opportunity to work with the Branch to successfully complete my thesis.

Thank you very much.

Hanoi, October 28, 2013 Students

Do Thi Minh Thuy

INTRODUCTION

INDEX

PAGE

CHAPTER 1: OVERVIEW OF LENDING ACTIVITIES AND LOAN QUALITY FOR SMALL AND MEDIUM ENTERPRISES 1

1.1 Basic concepts and characteristics of Vietnamese SMEs 1

1.1.1 Concept and classification of Vietnamese SMEs 1

1.1.1.1 Concept of Vietnamese SMEs 1

1.1.1.2 Classification of Vietnamese SMEs 1

1.1.2 Characteristics of SMEs 2

1.1.3 The role of SMEs in the economy 3

1.2 Commercial bank lending activities for SMEs 5

1.2.1 Concept of lending and lending principles 5

1.2.1.1 Concept of lending 5

1.2.1.2 Basic principles in lending activities 5

1.2.2 Lending methods for SMEs 6

1.2.3 The role of lending activities 9

1.2.3.1 For SMEs 9

1.2.3.2 For banks 10

1.3 Assessment of loan quality for SMEs 10

1.3.1 Concept of loan quality 10

1.3.2 Loan quality assessment criteria 11

1.3.2.1 Group of qualitative indicators 11

1.3.2.2 Group of quantitative indicators 12

1.4 Factors affecting loan quality for SMEs 16

1.4.1 Objective factors 17

1.4.2 Subjective factors 18

1.4.2.1 From the customer side are SMEs 18

1.4.2.2. From the bank side 19

CHAPTER 2: CURRENT SITUATION OF LENDING TO SME AT NORTH HANOI BRANCH - VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE 21

2.1 Overview of Joint Stock Commercial Bank for Industry and Trade - North Hanoi Branch 21

2.1.1 Formation and development process of North Hanoi Branch 21

2.1.2 Organizational structure and personnel 23

2.1.2.1 Roles and responsibilities of departments: 23

2.1.2 Characteristics of the business environment of Vietnam Joint Stock Commercial Bank for Industry and Trade, North Hanoi Branch 25

2.1.2.1 Advantages 25

2.1.2.2 Difficulties: 26

2.1.3 Business performance of Vietinbank – North Hanoi in 2011 and 2012 26

2.1.3.1 Capital mobilization activities 28

2.1.3.2 Lending activities 30

2.2 Current status of lending to small and medium enterprises at the North Hanoi Industrial and Trade Joint Stock Commercial Bank in the period of 2011-2012 31

2.2.1 Loan processes and products for businesses at Branch 31

2.2.1.1 Loan process for businesses at Branch 31

2.2.2 Loan products for SMEs of Branch 35

2.2.3 Loan turnover for SMEs in the period 2011-2012 36

2.2.4 Debt collection turnover for Vietnamese SMEs in the period 2011-2012 37

2.2.5 Loan structure for SMEs in the period 2011-2012 39

2.2.5.1 Debt structure for SMEs classified by term 40

2.2.5.2 Structure of outstanding loans to SMEs by industry 41

2.2.5.3 Debt structure for SMEs by business type 42

2.2.6 Overdue debt ratio 43

2.2.6.1 Overdue debt ratio in SME lending by business type 46

2.2.6.2 Overdue debt ratio by industry 47

2.2.6.3 Overdue debt ratio by loan term 48

2.2.6.4 Ratio of bad debt to overdue debt 49

2.2.7 Analysis of some indicators to evaluate loan quality at Bac Ha Noi Branch in 2011-2012 49

2.2.7.1 Credit turnover 49

2.2.7.2: Capital efficiency 50

2.2.7.3 Profit from lending to SMEs 51

2.3 Assessment of lending quality for SMEs at the Branch in 2011-2012. 52

2.3.1 Achievements 52

2.3.1.1. On the qualitative aspect 52

2.3.1.2 On the quantitative side: 53

2.3.2. Limitations in lending activities to SMEs 53

2.3.3. Causes of limitations 54

2.3.3.1 From the Bank 54

2.3.3.2. From the customer side (SMEs) 54

2.3.3.3 From the economic side 55

CHAPTER 3: SOME SOLUTIONS TO IMPROVE THE QUALITY OF LOANS FOR SME AT VIETINBANK BRANCH - NORTH HANOI 56

3.1 Development orientation of Vietinbank - North Hanoi in the next few years 56

3.1.1 Orientation of lending activities for SMEs at the North Hanoi Branch of the Bank for Industry and Trade in the coming years 56

3.2 Solutions to improve lending quality for SMEs at the North Hanoi Branch of the Bank for Industry and Trade 57

3.2.1 Enhance capital mobilization efficiency 57

3.2.2 Building appropriate lending policies 58

3.2.3 Building flexible customer policies 59

3.2.4 Completing the loan process 61

3.2.5 Perfecting customer information system 61

3.2.6 Improving risk assessment for SMEs 62

3.2.7 Strengthen Marketing activities 64

3.2.8 Improving the quality of credit officers 64

3.2.9 Strengthening inspection and control work 65

3.3 Some recommendations 66

3.3.1 Recommendations to the Government and the State 66

3.3.2 Recommendations to the State Bank 67

3.3.3 Recommendations to Vietnam Joint Stock Commercial Bank for Industry and Trade 68

3.3.3.1 For Vietnam Joint Stock Commercial Bank for Industry and Trade 68

3.3.3.2 For Vietnam Joint Stock Commercial Bank for Industry and Trade - North Hanoi 69

3.3.4 Recommendations for Vietnamese SMEs 70

CONCLUDE

LIST OF ABBREVIATIONS

Abbreviation Full Name

Branch Office

Enterprise

SMEs Small and Medium Enterprises

Bank

Industrial and Commercial Bank

Commercial Bank Commercial Bank

Credit institutions

Joint Stock Commercial Bank

VND Vietnamese Dong

LIST OF TABLES

PAGE

Table 1.1: Criteria for identifying SMEs in Vietnam 2

Table 2.1: Business performance results of Vietinbank – North Hanoi 26

Table 2.2: Capital mobilization performance table of Vietinbank – Bac Ha Noi ..28 Table 2.3: Lending performance table of Vietinbank – Bac Ha Noi 30

Table 2.4: SME lending turnover of Vietinbank - North Hanoi 36

Table 2.5: Debt collection turnover of Vietnamese SMEs 37

Table 2.6: Outstanding loans to SMEs at Vietinbank – North Hanoi 39

Table 2.7: Structure of outstanding loans of SMEs by term at Vietinbank - North Hanoi ..40 Table 2.8: Structure of outstanding loans with SMEs by industry 41

Table 2.9: Outstanding debt structure for SMEs by business type 42

Table 2.10: Overdue debt situation of SMEs at Vietinbank - North Hanoi classified by debt group 44

Table 2.11: Overdue debt situation by industry 47

Table 2.12: Overdue debt ratio by term 48

Table 2.13.: Credit turnover of SME lending activities 49

Table 2.14: Capital utilization efficiency 50

Table 2.15: Profit margin from lending to SMEs 52

LIST OF DIAGRAM AND DRAWINGS

Diagram 2.1: Organizational structure of the Joint Stock Commercial Bank for Industry and Trade, North Hanoi Branch:.23 Diagram 2.2: Lending process at Vietinbank Branch 31

Chart 2.1: Overdue debt structure of SMEs by business type 46

Chart 2.2: Profit from lending to SMEs over the years 51

INTRODUCTION

1. Urgency of the topic

Since Vietnam implemented the open-door economic policy in 1986, the Vietnamese economy has developed rapidly and with great promise. GDP has been constantly improved, people's lives have been increasingly improved, and above all, Vietnam's economic and political position has been known and affirmed in the eyes of countries in the region and the world. In that transformation and development, the contribution of Private Enterprises, State-owned Enterprises and Small and Medium Enterprises is very significant. In particular, small and medium enterprises, with their dynamism, operations in many fields, and large numbers, have contributed significantly to increasing national income (GDP), reducing inflation, solving employment problems, helping to adjust macroeconomic policies, etc. However, in the current context of an economy implementing comprehensive integration and globalization, enterprises in Vietnam have had to face enormous challenges and difficulties. These are the lack of capital, technological backwardness, lack of competitiveness in product design and quality, and lack of flexibility and low quality of labor.

Realizing that the demand for loans from small and medium enterprises is very large, Vietnam Joint Stock Commercial Bank for Industry and Trade, North Hanoi Branch, has had strategies to attract and promote lending activities to this group. However, the lending process for small and medium enterprises still faces many difficulties, especially the quality of lending activities is not high. Therefore, improving the quality of lending to this type of enterprise is necessary so that the bank can expand the total outstanding loans and enterprises can have the necessary capital to serve their production and business activities.

From the above roles and urgent requirements, I have chosen the topic: "Solutions to improve the quality of lending to small and medium enterprises at the Vietnam Joint Stock Commercial Bank for Industry and Trade, North Hanoi Branch" as the topic for my graduation thesis.

2. Research objectives of the topic

The research objective of the topic is to clarify the theoretical basis of lending activities and the current lending situation for small and medium enterprises of the Vietnam Joint Stock Commercial Bank for Industry and Trade, North Hanoi Branch, in order to make recommendations to improve the quality of the bank's lending activities.

3. Research object and scope

The research object is to study lending activities for small and medium enterprises of Vietnam Joint Stock Commercial Bank for Industry and Trade, North Hanoi Branch.

The scope of the study is bank lending activities to small and medium enterprises in 2011 and 2012.

4. Research methods

The topic is based on descriptive statistics, comparison and contrast, and combined with analytical data. The thesis has evaluated the overall performance and current status of bank lending to small and medium enterprises through economic indicators to find out issues related to the quality of bank lending to small and medium enterprises, from which recommendations can be made to improve the quality of bank lending.

5. Thesis structure includes:

In addition to the introduction and conclusion, the main content of the paragraph includes 3 chapters:

-Chapter 1: Overview of lending activities and loan quality for small and medium enterprises.

-Chapter 2: Current status of lending activities for small and medium enterprises at Bac Ha Noi Branch - Vietnam Joint Stock Commercial Bank for Industry and Trade.

-Chapter 3: Solutions to improve the quality of lending activities for small and medium enterprises at the North Hanoi Branch - Vietnam Joint Stock Commercial Bank for Industry and Trade.

CHAPTER 1: OVERVIEW OF LENDING ACTIVITIES AND LOAN QUALITY FOR SMALL AND MEDIUM ENTERPRISES

1.1 Basic concepts and characteristics of SMEs

1.1.1 Concept and classification of SMEs 1.1.1.1Concept of SMEs

According to the Law on Enterprises issued on November 29, 2005 , in Vietnam, "An enterprise is an economic organization with its own name, assets, and a stable transaction office, registered for business in accordance with the provisions of law, for the purpose of carrying out business activities - that is, carrying out one, several or all stages of the investment process, from production to consumption of products or provision of services on the market for the purpose of making a profit."

The concept of SMEs in countries around the world is currently only relative in terms of time and space. The scale of SMEs in different countries is different and it is possible that the scale of SMEs in the US, Japan, France is larger than the scale of SMEs in Vietnam, and the scale of SMEs in a country at the present time may be larger than the scale of SMEs in that country in the previous period.

In Vietnam , according to Decree No. 56/2009/ND-CP dated June 30, 2009 of the Government on supporting the development of SMEs , SMEs are defined as: " Small and medium-sized enterprises are business establishments that have registered to do business in accordance with the law, divided into three levels: micro, small, medium according to the scale of total capital (total capital is equivalent to total assets determined in the balance sheet of the enterprise) or average number of employees per year (total capital is the priority criterion)". (The criteria for total assets and average number of employees of SMEs are shown specifically in Table 1.1 )

In Malaysia , the Small and Medium Enterprises Development Corporation (SMIDEC) – an agency under the Ministry of International Trade and Industry – has come up with a definition of SMEs that has gradually become widely accepted. Accordingly, SMEs are defined as a company, a factory or an enterprise with an annual turnover of about 25 million Ringgit (equivalent to 6.6 million USD) and no more than 150 full-time workers.

So in this thesis, when we talk about SMEs, we are talking about enterprises classified according to the criteria of enterprise size.

1.1.1.2 Classification of SMEs

According to the standards of the World Bank and the International Finance Corporation (IFC) in 2003 , SMEs are divided by size as follows:

Micro-enterprise: Has up to 10 employees, total assets of no more than 100,000 USD and total annual revenue of no more than 100,000 USD.

Small - enterprise : Has no more than 50 employees, total assets worth no more than 3,000,000 USD and total annual revenue no more than 3,000,000 USD.

Medium - enterprise: Has no more than 300 employees, total assets worth no more than 15,000,000 USD and total annual revenue of no more than

15,000,000 USD.

However, in each country and territory, people have different criteria to classify and identify SMEs.

In Vietnam , SMEs are divided according to the criteria of production capital and labor. Specifically:

Table 1.1: Criteria for identifying SMEs in Vietnam

Scale

Area

Micro Enterprise	Small Business		Medium Enterprise
Number of employees	Total capital	Number of employees	Total capital	Number of employees
1. Agriculture, forestry and fishery	10 people or less	20 billion VND or less	from 10 to 200 people	from over 20 billion VND to 100 billion VND	from 200 to 300 people
2. Industry and construction	10 people or less	20 billion VND or less	from 10 to 200 people	from over 20 billion VND to 100 billion VND	from 200 to 300 people
3. Trade and services	10 people or less	10 billion VND or less	from 10 to 50 people	from over 10 billion VND to 50 billion VND	from 50 to 100 people

Maybe you are interested!

(Source: Decree No. 56/2009/ND-CP dated June 30, 2009)

1.1.2 Characteristics of SMEs

SMEs are numerous and diverse in terms of industry and size. However, some notable characteristics of SMEs can be mentioned:

Firstly, SMEs have low capital scale and financial capacity.

This is the most prominent feature of SMEs. SMEs have low initial capital, so their ability to mobilize capital will not be high, causing difficulties in accessing bank credit. Low initial capital affects the scale of equipment investment of the enterprise, the ability to invest in depth, and many other factors.

Second, SMEs use outdated technology and equipment.

The above characteristics also come from the low capital scale of SMEs. Investing in modern technology and equipment requires a large amount of capital. Investing in upgrading outdated machinery and equipment also requires good financial capacity, allowing for long-term investment. Meanwhile, in Vietnam, capital for investment in technology is a source of capital that SMEs have difficulty accessing. In addition, to be successful in a highly competitive economy like today, businesses must constantly change technology, machinery, equipment, methods, and production secrets. However, most of the technology currently used in SMEs in Vietnam is currently considered outdated, due to lack of knowledge in selecting, purchasing, and transferring technology.

Third, the management level is still low.

SME managers are often not properly trained in expertise and profession, and lack full understanding of business administration, leading to many business directors being unable to make financial plans and develop feasible production and business plans.

In addition, SMEs also have a low quality labor force. The reason is that SMEs are not able to attract high quality human resources because the working conditions and working regime in SMEs do not meet the salary and bonus levels as in large enterprises.

Fourth, poor access to information.

The lack of information about market demand, equipment, raw materials... has weakened the competitiveness of Vietnamese SMEs. Moreover, the lack of information makes the production and business process not have accurate orientation.

Fifth, simple organizational structure, compact organization, small number of employees.

Most of the SMEs in Vietnam are family-owned companies, operating under a self-managed model, the management levels from the director to the chief accountant and department heads (if any) are someone with family relationships, have not attended basic training courses in management and business skills, only operate the business based on experience, the workers in SMEs are mainly manual workers, low-skilled. Therefore, SMEs often have unfortunate events such as unintentional violations of state regulations and international practices, ineffective business operations leading to bankruptcy. The advantage of this characteristic is that SMEs are flexible, easily adaptable to market changes.

1.1.3 The role of SMEs in the economy

SMEs account for the majority of enterprises operating under the law. And in each economy, country or territory, SMEs play roles at different levels, but in general, they all have the following similar roles:

Solutions to improve lending quality for small and medium enterprises at Vietnam Joint Stock Commercial Bank for Industry and Trade - North Hanoi Branch - 1

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