Solutions to improve the quality of consumer lending activities at Vietnam Prosperity Joint Stock Commercial Bank - 2

(1 (5)

(2)

(4)

Client

(1): Customer and bank sign contract.

(2): The customer pays a portion of the purchase price of the asset to the retailer in advance. (3): The bank pays the remaining amount to the retailer.

(4): The retail company delivers the goods to the customer. (5): The customer pays the bank.

1.2.3.4 Based on the form of loan security

Pawn loan: is a form of loan in which the bank holds the customer's assets to ensure the fulfillment of obligations when the customer cannot repay the debt.

Salary mortgage loan: this form is applied to customers with stable jobs, income in addition to covering regular expenses can accumulate to repay the loan. At that time, the customer's loan demand will be determined based on the loan demand, the customer's regular net income, the maximum loan amount of the bank.

Loans with collateral assets formed from borrowed money: this form is mainly applied to customers who need consumer loans to buy high-value assets with long-term use. The bank's loan amount depends on the financial situation, the customer's ability to repay, the value of the purchased assets and the maximum loan amount is usually from 50 - 70

% of purchase value.

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1.2.4 The role of consumer lending activities

1.2.4.1 For the economy

Consumer lending helps improve people's lives and enhance their quality of life. This is an important factor in stabilizing, fighting deflation and promoting socio-economic growth.

Consumer lending is a lever to stimulate consumption of goods and services, increasing people's purchasing power stimulates production development, creating conditions for businesses to expand and develop production to meet people's needs, thereby creating momentum for economic development, consumer lending also creates conditions to attract foreign investment in consumer goods production sectors. This will increase employment, reduce unemployment, and stabilize society.

1.2.4.2 For banks

Consumer lending is a credit segment that brings great profits to banks. The revenue of banks through consumer lending is very significant due to attractive consumer credit interest rates, especially the very high real interest rates for installment loans, which makes consumer lending account for a significant proportion of the bank's profit structure.

Providing this service also helps banks diversify investments, expand and tighten relationships with customers, exploit potential and customer loyalty, enhance the reputation and image of the bank, thereby attracting capital from borrowers when they have idle money.

In addition, consumer lending is a new development direction, a modern product, contributing to helping banks effectively utilize mobilized capital, diversify products, expand new services to attract customers to their banks. Thereby, it helps to increase income, increase competitiveness, expand markets, enhance reputation, promote image and brand, disperse risks, creating a unique feature for banks.

1.2.4.3 For customers

Consumer loans are very important to customers. The consumption needs of individuals and households are very large and frequent, but they do not always have enough financial resources to meet those needs. Thanks to consumer loans, they enjoy the benefits, use the goods and services they want before accumulating enough money. When meeting the conditions for consumer credit, borrowers can purchase goods, especially real estate goods.

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products at the present time when their prices are falling, or can travel at the right time. Especially, in cases of urgent spending such as medical needs, education... the role of consumer loans is even greater and clearer.

1.2.4.4 For manufacturers

Consumer loans supplement the missing amount to help consumers have enough financial capacity to enjoy the value of goods and services, thereby boosting product consumption, resolving the deadlock between production and circulation stages. Thereby, manufacturers sell more products, rotate capital faster, on that basis have conditions to invest in expanding production. Thus, consumer loans contribute to improving business efficiency, increasing income for manufacturers.

1.2.5 Consumer lending process of commercial banks

The lending process is a synthesis of specific tasks that credit officers and related departments in the bank must perform when providing capital to customers. To standardize the process of contacting, analyzing, lending and collecting debts, each commercial bank often builds its own lending process. Between banks, the process may differ, depending on the characteristics and organizational management capabilities of the bank, but in general, it includes the following 6 steps:

Step 1 : Receive credit documents: Customers who need to borrow capital come to the bank to apply for a loan. Here, credit officers guide customers on how to complete a complete and correct application. Credit documents usually include: legal documents, economic documents and loan documents.

Step 2 Credit appraisal: This is an important step in the consumer lending process, determining credit quality. Credit officers who make wrong appraisals will make wrong decisions. The appraisal process includes:

- Appraisal of loan source characteristics

- Appraisal of loan purpose

- Assess the financial situation and payment ability of customers

- Appraisal of collateral and mortgaged assets.

Step 3: Review and decide to lend: After the appraisal process, the credit officer will notify the superior to submit to the review board and make a decision to lend. After the decision has been made, the Bank must issue a written notice to the Customer to clearly state the content (if the loan is not granted, the reason must be detailed).

Step 4 Complete legal procedures and proceed with disbursement: After reviewing and deciding to grant a loan, the Bank and the Customer proceed to sign a credit contract.

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The main elements of a credit agreement are:

- Customer: full name, address, legal status (if any).

- Purpose of use: Customer must clearly state what the loan is used for.

- The amount or credit limit that the bank commits to provide to the customer.

- Applicable interest rate: the interest rate that the customer must pay, fixed or variable interest rate, conditions for changing the interest rate.

- Fee to obtain credit commitment from the bank, calculated as a percentage of the committed limit.

- Loan term: is the period in which the Bank provides credit to the Customer, calculated from the time the Bank's first capital is issued until the time the Bank collects the last capital and interest.

- Types of guarantees: contents such as valuation, insurance, ownership, transfer or sale rights, rights to use guarantees... must all be clearly stated in the contract.

- Disbursement conditions and terms.

- Method and time of principal and interest payment.

- Other conditions: control of collateral, control of borrower's business activities, conditions for property auction, penalties for breach of contract... After signing the credit contract, the Bank will disburse to the Customer.

Step 5 Checking during the lending process: After disbursing to the customer, the bank must check whether the customer uses the loan for the right purpose or not. Collecting information about the customer: all information reflecting in a positive direction shows that the credit quality is being guaranteed. If the loan quality is threatened, timely measures must be taken. The bank has the right to collect the debt before the due date and stop disbursing if the borrower violates the credit contract.

Step 6: Debt collection or making a new credit decision: when the customer has paid all the principal and interest on time, the credit relationship between the Bank and the customer will end. However, besides safe loans, there are still loans that the customer cannot repay at the time of repayment, so the Bank must find out the reason and make a new decision: whether to extend the debt or sell the collateral to compensate for the risk.

In short, the lending process needs to be built in accordance with legal regulations, each customer group, and each type of bank loan. The lending process must ensure that the bank has all the necessary information but does not cause inconvenience to customers.

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A properly constructed lending process will increase operational efficiency, minimize risks and increase revenue for the bank.

1.3 Consumer lending quality of commercial banks

1.3.1 Concept of consumer loan quality of commercial banks

The quality of consumer loans is understood as bank loans that promptly and fully meet the needs of customers, cover all costs, repay the bank in full and on time both principal and interest, and have profits in line with economic and social development. The quality of CVTD is shown by:

For commercial banks: Lending quality is reflected in the effectiveness of lending in accordance with the bank's capacity and ensuring competitiveness, in the ability to recover principal and interest on loans in full and on time. The higher the efficiency and ability to collect debts, the higher the quality of lending and vice versa.

For customers: Loan quality is reflected in loans that are timely and fully met with reasonable and competitive interest rates. Loans from commercial banks help customers have enough money to satisfy their consumption needs and improve their quality of life.

For the economy : Loan quality is a concept that is both specific (expressed through calculable indicators such as: business results, credit turnover, overdue debt, solving consumer needs...), and abstract (impact on the economy...). Loan quality is influenced by both subjective factors (management ability, qualifications and ethics of bank staff and customers...), and objective factors (changes in the external environment: socio-political stability, legal environment, economic growth rate).

Loan quality is a comprehensive economic indicator, it reflects the level of adaptation of commercial banks to external changes, it shows the strength of a bank in the process of competition to survive and develop. Good lending activities must be based on the principle of satisfying customers' borrowing needs, meeting the needs of economic development, so banks need to identify target customers, better understand customer needs to have better service policies.

1.3.2 The need to improve the quality of consumer lending of commercial banks

Improving the quality of consumer lending is necessary for economic and social development. Consumer lending contributes to clearing the flow of goods, financing customers' spending on goods and services, stimulating demand, and creating conditions to promote economic growth.

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Consumer lending improves people's quality of life, thereby improving people's intellectual level and making society more civilized and developed.

Improving the quality of consumer lending determines the existence and development of commercial banks. Banking is a service industry with a long history of development, bringing many profits to the banking sector, but also contains many risks, of which one of the biggest risks lies in the traditional activities of banks - lending. And consumer lending accounts for a large proportion of lending activities. Risks in consumer lending can lead to insolvency, causing the collapse of the entire banking system, risks are always a concern for the banks themselves and the entire economy. Therefore, improving the quality of consumer lending will ensure that banks operate safely, survive long-term and have conditions for development.

Improving the quality of consumer loans helps increase capital turnover for banks, thereby creating more capital to increase the ability to provide services to customers, creating a good image of the bank's logo and reputation, increasing satisfaction and thereby increasing customer loyalty to the bank.

Therefore, improving the quality of consumer loans is an objective necessity for the long-term existence and development of banks.

1.3. 3 Criteria for assessing the quality of consumer loans of commercial banks

1.3.3.1 Qualitative indicators

These are the prerequisites for good loan quality implementation, and are indicators that are more difficult to determine than quantitative indicators, but they contribute significantly to the assessment of the loan quality of commercial banks. Qualitative indicators include:

Legal basis:

Consumer lending activities of commercial banks are based on the regulations of the State and the State Bank. The activities of commercial banks are considered to be of good quality when the Bank properly implements those regulations. In addition, if the legal system is simple but still ensures strictness, the credit policy of the Bank is flexible and suitable to the economic situation, it will improve the quality of credit and vice versa.

Credit process:

With a standard consumer lending process, implementing it quickly while still ensuring the correct principles is a measure to evaluate the lending quality of commercial banks. This is an important indicator that has a decisive impact on lending quality.

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Reputation of commercial banks:

The reputation of a bank is an important indicator, it affects the banking business in general and consumer lending in particular. If the bank has good reputation, customers will come to the bank and use the bank's products more often. The bank exists thanks to the trust of customers in the bank.

In short, consumer lending activities are considered to be of quality when they are carried out in accordance with the law, relevant regulations and rules, attracting many customers while still ensuring application principles.

1.3.3.2 Quantitative indicators

- Indicators on lending, debt collection, outstanding debt:

Consumer lending revenue

Consumer lending revenue is an indicator reflecting the total amount of money that the Bank lends to consumer customers in a certain period. The higher the consumer lending revenue, the larger the scale of consumer lending. The increase in lending revenue over the years shows that the bank's consumer lending activities are expanding. The increase in consumer lending revenue may be due to an increase in the number of consumer lending customers or an increase in the credit level of each customer. In addition, the Bank uses an indicator reflecting the proportion of consumer lending in the Bank's total lending revenue:

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Outstanding consumer loans

Outstanding consumer loans are indicators reflecting the amount of capital that consumer loan customers owe to the Bank at a specific time. High outstanding consumer loans reflect the Bank's reputation and the expansion of consumer lending activities. Low outstanding consumer loans indicate poor consumer lending activities, and the Bank is unable to expand its customer network. However, that does not mean that the higher the outstanding consumer loans, the better the lending efficiency.

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This indicator shows the extent to which the Bank focuses on consumer lending activities to study the fluctuations of this customer group to adjust the credit structure accordingly.

Consumer loan collection turnover, collection ratio:

Consumer loan debt collection turnover is an indicator reflecting the total amount of money the Bank has recovered after disbursing consumer loans in a certain period.

Banks reflect debt collection situation through the following indicators:

The debt collection ratio for consumer loans assesses the ability to recover capital from the lending bank's capital, showing how much the bank can collect for each loan in a certain period. The higher this debt collection ratio, the more effective the bank's consumer loan debt collection work is, and at the same time, it shows the customer's awareness of debt repayment, and the capital is used for the right purpose and effectively. If this ratio is low, it shows that consumer lending activities are likely to face risks due to customers not paying on time, and the bank's debt collection work is not closely followed, and credit appraisal work is still loose and subjective.

Consumer loan turnover:

Consumer loan turnover is an indicator to evaluate the efficiency of lending activities, reflecting the frequency of capital use.

In there:

The consumer loan turnover ratio reflects the number of credit transfer cycles of the Bank for consumer loans. The higher the capital turnover ratio, the faster the loan capital is circulated, the more effective the Bank is operating, and the more debt is collected for capital turnover. On the contrary, a low ratio indicates that there may be instability.

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in the process of capital recovery. Through this, the Bank will promptly take measures to remind and urge customers, promptly limiting possible risks. This is also the basis for the Bank to decide whether to lend in the next time or not.

- Consumer lending profit indicators:

Income from consumer lending activities:

A loan is considered to be of good quality when it generates income for the Bank. A bank is also a special enterprise operating with the ultimate business purpose of profit. Revenue from lending activities is the main source of income for the Bank to exist and develop. Profitable lending activities demonstrate that the Bank not only receives capital, is able to pay expenses, but also has additional profits.

This indicator reflects the profitability of the Bank's consumer loans, indicating the interest rate generated from lending activities per unit of income. With the same level of income, the more a Bank reduces input costs, the higher the income rate, proving that the Bank is operating well. This contributes to the effectiveness of consumer lending.

Profitability ratio from consumer lending:

This ratio reflects the profitability of consumer lending activities: for every dollar of consumer lending, how much profit does the bank earn? The higher this ratio, the more profit the bank earns from the capital it lends to consumers, showing the ability to use capital effectively or good credit quality and vice versa.

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Profit margin from consumer lending:

Loan interest rate =

Profit from CVTD activities Total profit

This ratio shows how much of the Bank's total profit is from consumer lending activities. The higher this ratio is, the more it proves the quality of healthy and high-quality consumer loans, affirming the position of consumer lending activities compared to other business activities, bringing efficiency to banking activities.

- Indicators on overdue debt and bad debt for consumer loans:

Consumer loan overdue debt ratio

Consumer loan delinquency rate =

Overdue consumer loans Total outstanding consumer loans

Overdue consumer loans is an indicator reflecting the total amount of money that the Bank has not recovered after a certain period of time from the date of lending to the customer to the due date of the loan. The higher the overdue debt, the more difficult it is for the Bank to control and handle the debt.

The overdue debt ratio is the percentage between overdue debt and the total outstanding debt of the Bank at a certain time. This ratio shows at the time of determination how many dong of overdue debt the Bank has for every 100 dong of loan.

This is an important indicator to evaluate the effectiveness of consumer lending. If the overdue consumer loan balance is smaller, the overdue consumer loan ratio is lower, the effectiveness of consumer lending activities is higher. If the overdue consumer loan ratio is higher, it shows that the Bank is facing risks and the possibility of losing capital. Banking activities in general and consumer lending activities in particular directly affect the profits and safety of business. Therefore, ensuring the timely recovery of sufficient consumer loan capital is an important issue in management, directly affecting the existence of banks.

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Consumer loan bad debt ratio

Besides the overdue debt ratio for consumer loans, the bad debt ratio for consumer loans is also often used to reflect the consumer lending situation:

Consumer loan bad debt ratio =

Bad debt of consumer loans Total outstanding consumer loans

This indicator shows the actual situation of consumer lending activities at the Bank, and at the same time reflects the Bank's ability to manage credit in lending and urging the collection of consumer loans. The higher the consumer loan debt ratio, the greater the bad debt and the greater the risk of capital loss, and the worse the Bank's consumer lending efficiency and vice versa. Depending on the actual situation of the customer, the Bank can take different measures to resolve bad debt, from debt extension to foreclosure of collateral.

1.3.4 Factors affecting the quality of consumer loans of commercial banks

1.3.4.1 Group of factors belonging to the bank itself

Bank development orientation: is a prerequisite for developing consumer lending activities. If in its development plan, the bank does not pay attention to this activity, when customers have needs, the bank will not meet them. If the bank wants to develop consumer lending activities, they will come up with strategies and policies to attract customers to the bank.

Financial capacity of the bank: is one of the factors that bank leaders consider when making decisions, including decisions on consumer lending activities. The financial capacity of the bank is determined based on many factors such as the amount of equity, the percentage of profit next year compared to the previous year, the ratio of overdue debt to total outstanding debt, the amount of liquid assets. When the bank has great financial strength, the bank can invest in portfolios and the bank is more interested, then consumer lending activities have the opportunity to develop.

Bank lending policy : is a system of policies, guidelines and regulations governing lending activities issued by the board of directors to effectively use capital to finance businesses, households and individuals. However, the factors in lending policy have a strong impact on lending expansion in general and consumer lending in particular.

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Bank's ability to monitor and handle credit situations: Consumer lending activities always contain unexpected and unpredictable risks. Therefore, monitoring and handling credit situations after lending is very important. Doing this well will help banks detect and promptly prevent negative manifestations such as misuse of capital, conspiracy to disperse assets, and bank fraud.

Ability to collect and process credit information: For banks in general and the quality of consumer lending activities of banks in particular, information is the basis for making lending decisions and monitoring and supervising loans with the aim of ensuring credit efficiency. Complete, accurate and timely information will help banks build or adjust business plans and credit policies flexibly to suit the actual situation, enhancing the ability to prevent risks and credit quality.

Banking technology, technical equipment: Is a tool to check credit activities such as loan use procedures, performing transactions with customers. A bank using modern technology equipped with high-quality technical means will facilitate simplification of procedures, shorten transaction time, and bring maximum convenience to loan customers. That is the premise for banks to attract more customers and expand credit. The support of modern technical means also helps to collect information quickly and accurately, and planning and building credit policies is also more effective.

Quality of human resources and human resource management of banks : the human factor is always considered to play a decisive role, directly affecting the operational and profitability of each bank. A team of officers and employees with good professional qualifications and a responsible working attitude is one of the top requirements for each bank, especially for lending activities. The quality of human resources here does not simply refer to professional qualifications but also includes the conscience, ethics, working style, and labor discipline of bank officers in general and credit officers in particular. Good human resource quality, expressed in the dynamism and creativity in work, a sense of responsibility and a high sense of organization and discipline of officers, can to some extent help banks compensate for limitations in technology and techniques, thanks to which banks can still survive and develop even though they have to compete with rivals with stronger potential in technology and technical equipment. In addition to the quality of human resources, human resource management also needs special attention, because not all good credit officers have high credit quality. Each credit officer has his or her own strengths and weaknesses, the important thing is to arrange and organize their work so as to maximize the strengths and minimize the weaknesses of each person, at the same time.

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There is a reasonable treatment regime to enhance the sense of responsibility, create smooth coordination of activities of each member in a unified machine towards a common goal of the need for quality bank credit.

1.3.4.2 Customer-related factors

Borrowing capacity of customers: is shown through factors such as customers' income, cultural level, habits, ethics... of customers. The income of consumer loan customers determines the needs of customers' consumer loans, the size of loans, and the development of consumer loans of customers. In addition, customers' income also determines whether or not the bank will lend, the bank bases on the future income of the customer because that is the main source of debt payment.

The ability of the customer to meet the loan conditions: means whether the customer can meet the conditions prescribed by the bank or not. Conditions such as collateral as well as valuable papers proving legal ownership and use of assets

Customer ethics and goodwill: loan quality is guaranteed if there is cooperation from the lender and the borrower. If the customer is not goodwilled, it will be very difficult for the bank to collect the debt. The customer's lack of goodwill is expressed in the credit relationship with the bank such as not providing full information, giving false information, intentionally defrauding and appropriating capital or doing illegal business, intentionally using capital for the wrong purpose or indirectly affecting the credit quality of the bank. These intentional acts all bring risks and make it difficult for the bank in lending activities.

1.3.4.3 Objective factors:

Economic environment: economic stability will create opportunities for consumer lending to develop effectively. Economic stability, especially monetary stability with indicators of prices, interest rates, exchange rates, and inflation, will reassure financial institutions to lend capital, customers will borrow capital to create more jobs, increase income, help customers feel secure about the stability of income as well as the stability of borrowing costs, costs of purchasing, repairing houses, and other goods and services, thereby increasing customer loans, while creating conditions to maintain and develop a sustainable two-way relationship of borrowing and repaying debts.

Cultural and social environment: Habits, psychology, customs, and education level have an impact on the need to use and access banking services, and on decisions to borrow and use bank loans. If people are afraid to use bank loans due to fear of debt, it will reduce lending sales, or low education level and labor in the area will lead to ineffective use of loans, affecting the ability to repay debts, causing losses for the bank.

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