The Role of Medium and Long-Term Credit in a Market Economy

1.1.3.2 High risk level

T&DH credit activities are always affected by many factors. Due to the large amount of investment capital and long investment period, the risk of a T&DH credit is high. The results of an investment project are affected by many factors, based on indicators of financial efficiency, technical - technological aspects, market, project human resource management, socio-economic efficiency... When the loan has a long investment period, there may be many changes in the economic and legal environment, causing the project to not operate as originally planned or to be unable to recover capital.

1.1.3.3 Profits from T&DH loans are large

The higher the risk of the project, the higher the expected profit that the investor expects. Not outside this rule, T&DH credits of banks often bring large income to banks. Therefore, the interest rate of T&DH credits of banks is often higher than short-term credits to compensate for the costs of mobilizing capital sources for T&DH credit activities as well as to compensate for risks.

Maybe you are interested!

T&DH credit interest rates can be fixed or floating, applied for the entire loan term, or can also be floating interest rates adjusted for certain periods throughout the loan term.

1.1.4 The role of medium and long-term credit in the market economy

1.1.4.1 For customers

In today's increasingly developing market economy, competition is increasingly fierce, requiring customers, especially businesses, to constantly innovate technology, invest to increase production capacity, and improve product quality. To do this, it is necessary to mobilize a certain amount of capital. In Vietnam today, when the financial market is not fully developed, T&DH credit is an optimal solution for businesses. The term of a T&DH loan is often shorter than the term of a bond, so it can be beneficial for businesses during periods of high interest rates. In terms of time procedures are quick and less complicated, saving registration costs, guarantee costs and securities selling costs.

market, moreover, not all companies are allowed to sell their bonds and shares on the stock market, especially newly established or very small companies. In particular, borrowing capital for investment and development from commercial banks will help businesses to be autonomous and have the ability to independently control production and business activities without having to share control with shareholders like raising capital by issuing shares.

T&DH credit meets the capital needs of investment projects that require large capital and have long loan terms, creating conditions for customers to expand production and business. T&DH credit with the inspection process before, during and after lending, closely monitoring the progress and purpose of capital use helps the business activities of enterprises go in the right direction to achieve the highest profit. However, the T&DH interest rate of the bank is a quite high cost for enterprises. This forces enterprises to think about investment efficiency, the profit achieved is not only enough to pay the capital and interest to the bank but also must bring profit for themselves. Therefore, the T&DH credit interest rate of the bank is a lever to encourage enterprises to fully exploit capital to do profitable business, improve the efficiency of capital use and business efficiency of enterprises.

1.1.4.2 For banks

Along with the need to expand scale and equip modern technical facilities of enterprises, it has shown that the need for T&DH capital is urgent and important. This is a condition for banks to expand their scope of operations and increasingly affirm their role and position, as well as strengthen their brand and enhance the competitiveness of banks in the market economy. If banks have a stable source of capital for long-term investment, it will generate much higher profits than using it for short-term loans, because each T&DH loan granted to enterprises is often very large, with high interest rates and long terms, so the interest income will be large and stable. Banks use T&DH credit as a tool to attract customers, strengthen the loyalty of traditional customers, and at the same time create new relationships with new customers. T&DH credit relationships can lead to the provision of other banking services to customers such as guarantee activities performed by banks; payment services, treasury services...

1.1.4.3 For the economy

Credit plays an important role in the economy, if effective, credit activities will have an impact on all economic - political - social fields. Originating from the function of concentrating and redistributing capital in the economy, credit activities have attracted excess and temporarily idle capital to put into production and business, meeting the capital needs of customers, thereby serving the growth of the economy. Credit activities play a role in implementing macroeconomic policies. The State Bank (SBV) always manages credit activities with its own regulations and policies. SBV plays the role of the lender of last resort in the economy, stabilizing monetary circulation. Although being a business unit, State-owned banks (SCBs) are still a part of the state, credit activities also aim to achieve national economic development goals through preferential credit policies. The bank's credit investment in T&DH according to the key sectors and within each sector contributes to forming a reasonable economic structure to serve the industrialization and modernization process so that these sectors take the lead, creating momentum for the country's socio-economic development.

In-depth credit activities, new construction… have created a solid technical infrastructure for the long-term development of the economy, contributing to increasing export turnover, creating favorable conditions for enterprises to compete in the international market. With increased production capacity, more goods and products are produced, enough for consumption and surplus for export. Many enterprises with modern machinery produce products to replace imported goods. All of these results contribute to saving foreign currency expenditure, increasing foreign currency income, creating a healthy international balance of payments.

In addition, the bank's T&DH credit also contributes to stabilizing life, creating jobs and stabilizing social order. Because T&DH credit invests in new areas, renovates and improves production capacity, it will create many jobs for workers. T&DH credit has become a bridge connecting economic relations between countries with each other through international credit activities.

1.2 QUALITY OF MEDIUM AND LONG TERM CREDIT

1.2.1 Concept of medium and long-term credit quality

Bank credit is a product that banks provide to serve their customers. Like other products, it also has quality, however, because the banking industry is a special economic sector specializing in the monetary sector, closely related to many areas of the economy, the quality of bank credit has its own characteristics.

Quality in general can be understood as the degree of suitability of a product for the needs of consumers or as a set of product properties, containing its level of adaptation to satisfy certain needs according to its use at the necessary social costs.

Credit quality is the reasonable response to the selective needs of customers, ensuring the existence and development of the bank while contributing to promoting socio-economic growth.

T&DH credit quality is the quality of loans with a term of over one year, which is considered to be of good quality when the loan capital is used for the right purpose to serve production and business activities, bringing efficiency, ensuring timely repayment of the debt to the bank, both covering costs, making a profit and bringing socio-economic efficiency.

From the above concept we see that customers, banks and economic development

Socioeconomic factors are three factors that are considered when considering T&DH credit quality.

 Credit quality from the banking perspective

T&DH credit quality is the Bank's medium and long-term loan capital that customers put into the production and business service process... creating a larger amount of money just enough to repay the principal and interest, cover other expenses and make a profit, in accordance with the conditions of the bank and the socio-economy in general.

 Credit quality from the customer's perspective

T&DH credit quality is the satisfaction of customer requirements with reasonable interest rates, simple procedures to attract customers but still comply with the right

Credit regulations contribute to improving the financial situation of enterprises, improving production and business activities and maintaining the existence and development of banks.

 Credit quality from the perspective of socio-economic background

In recent years, thanks to the credit activities of banks, it has contributed to changing the economy, contributing to shifting the economic structure towards industrialization and modernization.

Quality T&DH credit must support production and business activities, actively contribute to solving employment, building economic infrastructure, expanding production and business activities, enhancing efficiency and operational capacity of enterprises, promoting consumption, attracting maximum domestic capital, and at the same time taking advantage of foreign investment capital to serve the economic development process.

Through reviewing the credit quality of T&DH, we can draw some characteristics as follows:

 T&DH credit quality is a composite indicator, difficult to evaluate.

accurately. It is expressed through both qualitative and quantitative indicators.

 T&DH credit quality is affected by many subjective and objective factors.

Therefore, within the scope of this thesis, the quality of medium and long-term credit at the Bank for Agriculture and Rural Development of Vietnam, Phu Tho province branch is studied and evaluated from the perspective of the bank as the lender.

1.2.2 Indicators for assessing medium and long-term credit quality

1.2.2.1 Qualitative indicators

Loan guarantee principles:

A bank is a special economic organization, its activities have a great influence on the economic, political and social situation of the country. Therefore, the lending principle is an important principle for banks. To evaluate the quality of a loan, we must first consider whether the loan ensures two lending principles.

or not. That is the principle of using loan capital for the right purpose as agreed in the credit contract and the principle of repaying the principal and interest of the loan on time as agreed in the credit contract.

Loan conditions:

The bank only considers and decides to lend when the customer meets all the conditions.

following:

 One is: Having civil legal capacity, civil conduct capacity and being responsible.

civil liability as prescribed by law.

 Second: The purpose of using the loan is legal.

 Third: Having an investment project (DAĐT), a feasible and effective production and business plan (SXKD), or a feasible DAĐT, a plan to serve life in accordance with the provisions of law.

 Fourth: have sufficient minimum equity capital to participate in implementing investment projects according to regulations.

 Five: Implement regulations on loan guarantees as prescribed.

Appraisal process

The appraisal process is the most important qualitative criterion that determines the quality of the loan. The appraisal process is the best way for the bank to grasp information about the customer, the customer's legal capacity, ethics, financial situation, business situation, and ability to repay the loan. This is an indispensable step in the process of deciding to lend and monitoring the loan. The appraisal process must comply with the appraisal regulations and loan appraisal content of each bank. The main contents of project appraisal include:

 Appraisal of the necessity of project investment

 Market assessment of the project

 Technical appraisal of the project

 Assessment of project organization and management

 Appraisal of total investment capital and feasibility of capital sources

 Assess the financial effectiveness of the project

In addition, it also analyzes the risks that the project faces and proposes measures.

to minimize risk.

Efficiency of medium and long term capital:

+ For customers: T&DH credit capital contributes to building infrastructure for businesses, thereby creating conditions for businesses to increase competitiveness, promote production development, making production and business activities more effective. Only then can the ability to repay bank loans be ensured. On the other hand, when businesses operate effectively, they have the basis to be trusted customers of the bank.

+ For the economy: When banks and borrowers operate effectively, it will create conditions for economic development, social stability, job creation for workers, thereby improving workers' lives.

Customer satisfaction:

Is the service attitude of the bank staff enthusiastic, thoughtful, civilized, and polite or not? The credit process and credit needs of customers are satisfied with reasonable interest rates. All of these factors show whether customers are satisfied or not with the bank's services.

1.2.2.2 Quantitative indicators

T&DH capital mobilization index

+ Total T&DH capital and growth rate of this capital, this indicator shows the growth rate and ability to mobilize T&DH capital of the bank.

+ T&DH capital / Total mobilized capital: reflects the bank's T&DH capital structure and its ability to provide capital for development investment. The bank has no opportunity to expand credit activities if this ratio is too low.

T&DH debt balance indicator

This is an indicator reflecting the amount of T&DH capital that has been disbursed by the bank at a specific time. A large T&DH credit balance shows that the bank has a large credit scale, has great reputation with customers, and provides many diverse and rich forms of T&DH credit.

T&DH credit balance ratio =

T&DH credit balance

Total outstanding credit

The above indicator reflects the proportion of outstanding T&DH debt in the total outstanding credit of the bank in a period. The higher this proportion is, the more attention the bank pays to developing T&DH credit, the bank's ability to lend for investment project development for the economy. This indicator can also be used to see the correlation with short-term debt, as well as to compare between different banks to see the strengths of this bank compared to the strengths of other banks in T&DH credit activities.

T&DH loan sales target

This indicator reflects the amount of capital that the bank has disbursed to serve T&DH credits, helping businesses in investing in improving machinery and equipment, applying new technology... This number shows the trend of T&DH credit activities expanding or shrinking. However, increasing loan sales is not always good and conversely, shrinking loan sales is not always bad, this issue also depends on many factors such as the bank's potential, economic conditions in a certain period. When the loan sales are large, it often shows that the bank is reputable and provides diverse and rich services to customers. Good loan quality is the basis for increasing loan sales, so the T&DH loan sales indicator partly indicates the quality of T&DH credit.

Medium and long term capital utilization coefficient

Capital utilization ratio T&DH =

T&DH credit balance

Total capital T&DH

This ratio shows how much of the total mobilized T&DH capital the bank has used to finance T&DH credit activities. It assesses the safety, capacity and quality of T&DH lending of the bank. This indicator shows whether the ability to use mobilized T&DH capital to lend T&DH is high or low.

Comment