The Role of Credit in a Market Economy

real estate abroad. For this type of loan, the bank is secured by real assets: land, buildings and other structures.

Loans to financial institutions: includes loans to banks, insurance companies, finance companies and other financial institutions.

Agricultural loans: to support farmers in planting, harvesting, preserving products and raising livestock.

Industrial and commercial loans: help businesses cover expenses such as purchasing goods, raw materials, paying taxes, and paying salaries to employees.

Consumer loans: are credit granted to individuals and households to help finance the purchase of cars, houses, household appliances, construction materials to repair and modernize houses or cover hospital fees and other personal expenses.

Maybe you are interested!

Based on term:

- Short-term loans: are loans with a term of up to 12 months, used to offset the shortage of working capital of businesses and short-term spending needs of individuals and households.

- Medium-term loans: Are loans with a term of over 12 months to 60 months. Medium-term loans are mainly used by businesses to invest in purchasing fixed assets, expanding production and business, improving or innovating equipment, technology...

- Long-term loans: Are loans with a term of over 60 months, meeting the long-term needs of businesses such as: building factories, building new enterprises, improving and expanding production on a large scale.

Based on the level of trust with customers:

Unsecured credit: is a type of credit without collateral, pledge or third party guarantee, the loan is based only on the customer's own reputation. Customers are good customers, honest in business, have healthy financial capacity, effective management, then the bank relies on the customer's reputation without needing additional debt collection sources.

Secured credit: is credit based on the bank holding assets directly owned by the borrower or owned by the guarantor.

Common forms of security are: pledge, mortgage, or guarantee. The purpose is that when there is a violation of the credit contract, the bank has the right to handle those assets to recover the loan.

Based on the borrower:

Business credit (wholesale credit): called wholesale credit because businesses often borrow with large value loans.

Personal and household credit (retail credit): called retail credit because individuals and households often borrow small loans for consumption purposes.

Credit for financial institutions: is credit granted to insurance companies, finance companies, banks...

Based on loan repayment method:

- One-time repayment credit: is a type of credit in which the customer only repays the principal and interest once upon maturity, often applied to small and short-term loans.

- Installment credit: is a type of credit in which customers must repay the principal and interest periodically in equal amounts, applicable to large and long-term loans.

- Demand repayment credit: is a type of credit in which customers can repay the loan at any time, often applied to overdraft loans and credit cards.

Based on the value form of credit:

Cash credit: is a type of credit provided in cash. This is the main form of credit provided by banks. Cash credit is called lending.

Asset-based credit: Is credit whose value form is assets, this form of credit is financial leasing.

Based on credit origin:

- Direct lending: banks provide capital directly to customers in need, and borrowers directly repay the loan to the bank.

- Indirect lending: is a form of credit provision through intermediaries such as: entrusted credit, credit through organizations...

1.2.4. Lending methods

Single loan : each time the customer and the bank borrow capital, they carry out the necessary loan procedures and sign a credit contract. This method is applied to customers who have irregular loan needs, unstable production, seasonal business, or transactions.

Credit limit lending : the bank and the customer determine and agree on a credit limit maintained for a certain period of time.

Lending for investment projects : banks lend capital to customers to invest in production, business, service development and investment projects to serve life.

Syndicated lending : a group of credit institutions jointly lend to a loan project or loan plan of a customer. In which, there is a credit institution that acts as the focal point for arrangement and coordination with other credit institutions.

- Installment loans: when borrowing capital, the bank and the customer determine and agree on the amount of interest to be paid plus the principal amount that has not been divided into installments to be paid in installments during the loan term.

- Lending according to the reserve credit limit: the credit institution commits to guarantee the customer a loan within a certain credit limit. The credit institution and the customer agree on the validity period of the reserve credit limit and the fee paid for the reserve credit limit.

- Lending through the issuance and use of credit cards: Credit institutions approve customers to use the loan amount within the credit limit to pay for goods and services and withdraw cash at ATMs or cash advance points that are agents of the credit institution. When lending, issuing and using credit cards, credit institutions and customers must comply with the regulations of the Government and the State Bank of Vietnam on the issuance and use of credit cards.

- Overdraft loan: Is a loan in which the credit institution agrees in writing to allow the customer to spend more than the amount available in the customer's payment account in accordance with the regulations on payment activities through payment service providers of the Government and the State Bank of Vietnam.

1.2.5. The role of credit in a market economy

1.2.5.1. For the economy

- Bank credit circulates capital: The basic role of bank credit is to circulate capital from individuals, households, companies... with capital sources.

surplus to those in need of capital. The circulation of capital through banks is of great significance in promoting the efficiency of the economy.

Bank credit helps allocate financial resources effectively in the economy: Through bank credit, capital from those who lack effective investment projects is transferred to those who have more effective investment projects but lack capital. The result is economic growth, job creation and high labor productivity.

Through investing credit capital in key economic sectors and areas, the development of these sectors will be promoted... forming a modern, reasonable and effective structure.

Bank credit contributes to the circulation of money and goods, regulates the market, controls the value of money and promotes economic exchange between countries.

Bank credit brings in large revenues for the state budget through interest income and interest from government capital investment trusts.

Bank credit is a channel for transmitting state-funded capital to agriculture and rural areas to contribute to poverty reduction and social and political stability.

1.2.5.2. For customers

Bank credit promptly meets customers' capital needs with the advantages of being safe, fast, convenient, easy to access, and capable of meeting customers' large and diverse capital needs.

Bank credit helps investors grasp business opportunities, businesses have capital to expand production and business, and individuals have enough financial capacity to meet expenses to improve the quality of life.

Bank credit binds customers to repay principal and interest within a certain period of time. Therefore, customers are forced to make every effort, use loan capital reasonably and effectively, boost production to increase profits to ensure the ability to repay the bank.

1.2.5.3. For banks

Credit is a traditional activity, accounting for a large proportion of the total assets of the bank and bringing the main source of income for the bank.

Through credit activities, banks have diversified their asset portfolio and minimized risks.

Through credit activities, banks can expand other types of services such as attracting deposits, payments, consulting, foreign currency trading...

row

1.2.7. Credit process

Step 1: Prepare a credit application

- The bank interviews, gathers information and makes a preliminary assessment of the customer.

- Inform customers about loan policies, consult for

client

- Guide customers to prepare loan documents: loan application, legal documents, documents on financial situation, loan plan, business plan, collateral documents...

Step 2: Credit Analysis

- The bank analyzes the customer's current and potential ability to use credit capital as well as the ability to repay bank loans.

- Analysis objectives

- Identify possible risks associated with the loan.

- Forecast the customer's ability to control those types of risks and plan preventive measures.

- Check the accuracy of information provided by customers such as address, occupation, age, customer's credit history with the bank, loan purpose, collateral value appraisal if any...

Step 3: Credit Decision

- After checking and reviewing the necessary information, the bank decides to grant or reject the loan, the loan method, the terms (amount, interest rate, term, withdrawal conditions, form of guarantee...)

Step 4: Sign the credit contract and make a disbursement plan.

- With the approval of the board of directors and the credit manager, after a certain period of time, the credit officer will sign a credit contract with the customer and make a plan to disburse to the customer.

Step 5: Loan monitoring

- Monitoring the use of loan capital

- Monitor customer debt repayment performance

- Monitor and supervise the status of collateral assets

- Re-analysis of loans and debt classification

- Take appropriate measures

Step 6: Credit Clearance

- Release of the borrower's obligations to the lender

- Account settlement

- Liquidation of credit contract

- Release of collateral for loan

- Save profile

1.3. Credit performance

Until now, bank credit efficiency has often been considered from three perspectives – bank, customer and economy.

– For Banks: credit efficiency requires that bank credit activities must bring about certain economic benefits, but at the same time, the scope, level, limits, structure… of bank credit must be consistent with the bank’s own capacity, ensuring credit principles, minimizing risks in business operations, bank liquidity and competition issues, and ensuring safety of banking operations.

– For customers: credit efficiency means that credit activities must be suitable for the purpose and needs of customers, with reasonable scale, term, and cost, allowing customers to develop production and business effectively, have a source of repayment to the bank and grow.

– For the socio-economy: bank credit serving the production and circulation of goods contributes to job creation, exploiting the potential in the economy, promoting the process of accumulation and production concentration, resolving the relationship between bank credit growth and economic growth, economic development and macroeconomic stability.

The effectiveness of bank credit in all three aspects is closely related and cannot be separated. If the effectiveness of bank credit is only considered from the banking perspective, not suitable for the characteristics and needs of customers, then the effectiveness will only be short-term, or lack feasibility. Customers will not operate effectively, will not have a source of repayment to the bank, and the bank will not gain economic benefits from credit activities. When business units cannot survive and develop, and the banking system cannot recover loans, the economy will fall into a state of contraction and stagnation, not to mention the issue of development.

1.3.1. Concept of efficiency of bank credit operations

1.3.1.1. Bank's view on the efficiency of bank credit operations

row

Credit performance is both an abstract and a specific category that reflects all credit activities of commercial banks, including two factors: the level of safety and the profitability of the bank that bank credit activities bring.

From the bank's perspective, credit activities are considered effective when they ensure three factors:

- Ability to recover both principal and interest on time

- Liquidity

- Profitability for banks

This means that when banks make loans, the loans must generate income for the bank, ensuring that they can cover the cost of paying interest on mobilized or borrowed capital, credit operating costs and bank risks. However, it is not true that banks that lend a lot and bring in a lot of profit are highly effective because if they lend but cannot recover the loan capital or lend disproportionately to the mobilized capital, sooner or later the bank will fall into a state of loss.

Therefore, the efficiency factor in credit activities is an important and necessary factor for the existence and development of banks. Improving the efficiency of credit activities is a task of great significance for economic development both in the present and the future.

1.3.1.2. Customers' views on the effectiveness of bank credit operations

row

From the customer's perspective, credit activities are considered to have

effective when it meets customers' capital needs at the lowest cost and highest profit.

From the customer's perspective, credit activities are considered effective when they ensure the following factors:

Credit activities are diverse in product types, meeting the different needs of different customers.

Low cost and interest of credit.

The credit value, lending method and debt collection of the bank must be consistent with the capital usage requirements and business production cycle of the customer.

Loan procedures and processes must be simple, fast and convenient.

1.3.2. Indicators for evaluating credit performance

From a banking perspective

1.3.2.1. Outstanding loan growth rate

(This year's outstanding debt - Last year's outstanding debt)

Outstanding loan growth rate (%) = x 100%

Last year's outstanding balance

This indicator is used to compare the growth of outstanding credit over the years to evaluate the bank's lending capacity, customer search and credit plan implementation status.

The higher the index, the more stable and effective the bank's operations are. On the contrary, a low index shows that the bank is facing difficulties, especially in finding customers and ineffectively implementing credit plans.

1.3.2.2. Loan Sales Growth Rate (DSCV)

(DSCV this year - DSCV last year)

DSCV growth rate (%) = x 100%

DSCV last year

This indicator is used to compare credit growth over the years, evaluate lending capacity, customer search capacity and evaluate the implementation of the bank's credit plan. (similar to the outstanding loan growth indicator, but includes all outstanding loans in the year up to the present time and outstanding loans in the year that have been recovered)

The higher the index, the more stable and effective the bank's operations are. On the contrary, the bank is facing difficulties, especially in finding customers and showing ineffective implementation of the credit plan.

1.3.2.3. Debt collection ratio (%)

Debt collection turnover

Debt collection ratio = x 100%

Loan Sales

This indicator assesses the credit efficiency in debt collection of the bank.

This indicator reflects how much capital the bank will earn in a certain period with a certain loan turnover.

The higher the debt collection ratio, the better the bank's credit efficiency.

1.3.2.4. Profit rate (%)