Theoretical Basis of Bank Credit Solutions for Coffee Producers

People

borrow

Lender

(1)

(2)

(3)

Diagram 1.1 Representation of credit relationships

In other words, the process of “borrowing” is the process of leasing capital; the process of “paying” is the process of returning the leased capital. Therefore, after a period of using the leased capital, in addition to returning the leased capital, the lessee must pay interest to the lessor. The essence of credit activities is the interest earned, which is the added value that the lessee must pay to the lessor.

From the perspective of the Loan Fund, credit is the transfer of capital in cash from the lender to the borrower. With the intermediary function of coordinating capital in the economy of the bank, the credit relationship makes the role of the bank both a lender and a borrower. Therefore, bank credit is a loan relationship between the bank and entities with idle capital or in need of capital, solving the balance of " capital supply " to offset " capital demand " in the economy. Fully demonstrating (1) the borrowing process,

(2) the repayment process and (3) the repayment of loan interest; however, to ensure financial support for intermediary activities, the borrower of bank capital must pay additional interest to the bank (3') greater than the interest the bank pays to the lender (Diagram 1.2).

People

borrow

(1)

(2)

(3)+(3')

(1)

Bank

Lender

(2)

(3)

Diagram 1.2 Representing bank credit relations

Thus, the nature of bank credit is that commercial banks perform the function of intermediary in distributing loan funds for the purpose of enjoying interest rate differences , ensuring the operation of banks in the market economy.

1.1.1.2 The nature of bank credit solutions for coffee producers

In a narrow sense, bank credit solutions are lending activities of banks; banks lend capital, provide credit capital, invest credit capital for entities in need of capital in the economy. For borrowers being coffee producers, credit solutions for coffee producers are lending activities of banks to borrowers being coffee producers .

However, according to the Vietnamese Dictionary ( Nguyen Nhu Y, 1998 ), solution means a way to solve a problem ( solution : find the answer; method : way to do something). Therefore, the bank credit solution for coffee producers is not only understood mainly in the narrow sense of credit as lending activities, but also as the capital mobilization activity for bank lending . That means the capital mobilization activity of the bank, as a borrower, is part of the content of the bank credit solution.

Thus, with the nature of bank credit in general, the nature of bank credit solutions for coffee producers in a market economy is shown as follows: (1) Banks perform the function of monetary business, borrowing to lend, the source of capital for lending to coffee producers is capital mobilized by banks in the economy; (2) Coffee producers borrow capital from banks, in addition to repaying the principal, also

must pay interest, enough for the bank to pay interest on mobilized capital and lending costs to coffee producers 1 .

1.1.2 The role of bank credit solutions for coffee producers

Bank credit is a monetary business activity of commercial banks, with operating regulations according to the law, publicly and transparently; therefore, for coffee producers, the coffee industry and for the economy, bank credit solutions for coffee producers play an important role as follows:

Firstly, providing capital for coffee production helps coffee producing households improve production skills, strengthen economic accounting, and increase income for coffee producing households in the market economy.

Coffee is a crop that requires high cultivation techniques, coffee production activities last throughout the year, so there must be a large source of capital and be ready to respond promptly. In reality, in rural areas, borrowing relationships outside the market exist in many forms; however, with the " exorbitant " interest rates, the ability to meet capital with large and stable amounts of informal credit for an entire coffee-growing area is impossible, so coffee producers lacking capital must turn to banks. With the functions and scale of operations of the commercial banking system, bank credit can best meet the capital needs for coffee producers to carry out all production activities with the maximum amount of capital and at any time during the coffee production season.

In addition, with the principle of repaying both principal and interest, bank credit forces coffee producers to calculate carefully before deciding to use the loan capital with the purpose of generating profit and ensuring the obligation to repay the bank loan. To do so, in addition to improving the level of farming techniques, producers must increase

1 In fact, the term “ solution ” is used in many meanings depending on the context. In the “ big solution ” there are many “ small solutions ”. On that basis, the thesis uses the term “ credit solution for coffee producers ” as one of the “ credit solutions” of the bank ( small solution ), in the context of the operation of financial - monetary solutions to stabilize the macro economy ( big solution ). In many cases, especially when solving specific problems, the term “ solution ” is used synonymously with “ measure ”.

Strengthen economic accounting of capital use, especially bank loans, throughout the coffee production process.

Second, ensure value chain continuity and contribute to the new value addition of the coffee industry.

The production purpose of coffee producers is to create raw coffee products, expressed in the form of coffee beans . The coffee industry value chain shows the continuity in buying and selling, circulating coffee beans through stages from production to processing and trading; in which, the production of coffee beans by coffee producers is the beginning and has the most important meaning.

With lending activities, bank credit solutions support capital during the production process for coffee producers to create high-yield and good-quality coffee beans, competitive enough in the market. The new value brought to the coffee industry is reflected in the fact that thanks to bank credit capital, coffee producers have the conditions to apply new production technology, reduce labor costs, and reduce post-harvest losses of coffee.

Third, act as a "bridge" to implement national policies on agriculture and rural areas, positively impacting the socio-economy and ecological environment.

The goal of the socio-economic development policy is to aim for balanced and harmonious development between regions and economic areas. In addition to supporting the agricultural and rural areas through funding policies, agricultural and rural policies are also implemented through bank credit solutions.

With the principle of supply and repayment, the bank credit solution has directly stimulated production and exploited resources in the agricultural and rural areas. Credit capital participating in the development of coffee production has led to the development of other production and business sectors such as fertilizer, fuel, processing, trading, services, export, and job creation, not only in rural areas but also in urban areas.

On the other hand, coffee is a perennial industrial plant with a large and closed canopy covering the ground; therefore, growing coffee is considered as afforestation, coffee gardens can replace production forests ( National Assembly, 2003 ). In terms of ecological significance, in suitable areas and with sustainable coffee production methods, bank credit capital participating in the process of planting and caring for coffee gardens is a contribution to the process of protecting the natural ecological environment.

1.1.3 Characteristics of bank credit solutions for coffee producers

Bank credit solutions for coffee producers have the following characteristics:

One is, it depends on the seasonal nature of the coffee plant.

The characteristic of the coffee production cycle is that it lasts almost a year, one crop per year. From the beginning of the season, when watering and fertilizing begin, to the time of harvesting coffee beans is more than 8 months; the harvesting and processing stage into finished coffee beans is more than 2 months; plus the time for storing and selling the product, the coffee production cycle is almost a year.

On the other hand, the need for " capital " from the beginning of the season and the possibility of " temporary capital surplus " at the end of the season occur mainly in the coffee production household economy, leading to the phenomenon of bank lending activities also having peak periods in two periods in a year: (a)

The lending period when entering the coffee production season and (b) the debt collection period when the coffee producer harvests the product. This directly affects banking activities due to the large fluctuations in the number of customers transacting.

Second, there is a relatively long loan period.

With the characteristics of a perennial industrial crop, coffee trees have a basic construction period of about 3 years; therefore, the credit loan term for new planting can be up to 3 years. When coffee moves to the business stage, the maximum loan term for coffee care is 1 year, but it often lasts for decades until the coffee producing household no longer needs to borrow capital. On the other hand, coffee gardens are valuable real estate, the main source of income for households. Coffee producing households cannot regularly switch crops like some other short-term crops. Therefore, the problem is that the capital source arranged for loans for coffee producing households must be stable and long-term.

Third, it is subject to many risks from the impact of the domestic and world coffee markets.

The coffee industry in our country has a fragmented and inconsistent industry structure, and a weak competitive position in the world coffee market (Tran Thi Quynh Chi, 2008) , while on the London and New York exchanges, coffee prices fluctuate frequently and are very unpredictable (Ministry of Agriculture and Rural Development, 2012) . Coffee is an agricultural commodity produced mainly for export, and price risks from the world coffee market have directly and strongly impacted the domestic coffee market, causing negative impacts on the economy of coffee producing households. To avoid credit capital losses due to general risks, banks strictly apply loan guarantee conditions for coffee producing households when borrowing from banks.

Fourth, it is intended for agricultural production, but can easily be converted into consumer credit.

This characteristic comes from the capital management policy and personal spending management of the household economy. The source of capital and the use of capital in the coffee production household economy over a period of a year includes many sources of income and many sources of expenditure; along with the easy capital management, it is very difficult to control the use of borrowed capital for production purposes to use borrowed capital for consumption to improve the quality of life.

In case coffee producing households arbitrarily use loan capital from production purposes to consumption purposes, if there is no financial source to compensate, it will lead to a lack of capital for production, reduce the efficiency of coffee production, and lower the quality of credit capital. Therefore, to ensure that loans are used for the right purpose of coffee production, banks need to strengthen post-lending inspections for coffee producing households to monitor the credit capital that has been lent.

Fifth, credit activities in rural, remote and difficult areas.

Coffee is often grown in highland and mountainous areas, forming a large specialized area. This is an obstacle for banks, because accessing coffee producing households for lending in a relatively large area, the terrain is divided by hills, rivers and streams; the number of loans is large but small; meanwhile, the educational level of the people is low, lacking information. This characteristic shows that the cost of lending to coffee producing households is higher than the cost of lending to other subjects in urban areas and densely populated areas.

1.1.4 Research content on bank credit solutions for coffee producing households

To ensure the research objectives, clearly demonstrate the content of credit solutions , the research content of bank credit solutions for coffee producing households includes the following contents:

1.1.4.1 Determining the bank loan needs of coffee producers

Determining customers' loan needs is an important content in building a commercial bank's business plan, because it is the basis for banks to build plans on capital, finance, network, human resources... Through determining the market's and customers' loan needs, commercial banks can identify the market segments that need to be exploited with the aim of finding profits, ensuring the safety of loan capital and being suitable for operating capacity.

Determining the capital needs of coffee producing households needs to be done in the following aspects: (1) Overall capital needs of coffee producing households in the area;