SOLUTIONS FOR IMPROVING CREDIT QUALITY FOR SMALL AND MEDIUM ENTERPRISES AT BIDV THANH XUAN BRANCHCHAPTER 1: INTRODUCTION

1. Rationale:Banks credit has always been the most vital source of money for every economic entity. The efficiency of this capital will directly affect the strength of an economy. Due to rapid growth of our country Vietnam, the number of small and medium enterprises has surged to an incredible amount of 96% in a total of nearly 300000 enterprises nation-wide. These enterprises are contributing about 40% of national GDP and are recognized as an important asset in the era of industrialization and modernization. Consequently, small and medium enterprises (SMEs) have proven to be holding an essential role among other entity. Nevertheless, the development of these SMEs has encountered many problems. One of which is the difficulty in getting the approval for capital from banks. On the other hand, numbers suggested that there has been an increase in bankings idle capital over the last few years, which in turn could greatly hinders the expansion of the SME and broader, Vietnams economy. Additionally, lending capital to SMEs helps banks manage credit risk, increase revenue from services, and at the same time develop public relation. In short, banks must find a way to expand their lending to more SME customers while maintain the quality of these loans. Recognizing these facts, in recent years, commercial banks have been focusing on SMEs. The role of SMEs is also becoming more essential in the intense competitive environment among banks. BIDV Thanh Xuan has also grasped the guidelines and the trend of the economy. The branch has been stepping up in promoting credits for SMEs in recent years. These activities have reported encouraging results but have also revealed many difficulties and limitations. Therefore, over the time spent at BIDV Thanh Xuan, Ive chosen the thesis: Solution for improving credit activities for small and medium enterprises in BIDV Thanh Xuan.

2. Research questions: What is the situation of credit activities for SMEs in BIDV Thanh Xuan from 2011 to 2013? What are the current limitations of credit quality for SMEs in BIDV Thanh Xuan? What are the solutions to improve the credit quality for SMEs in BIDV Thanh Xuan?

3. Research objectives: Conclude a full analysis of BIDV Thanh Xuans SMEs credit activities Suggest some solutions on how to improve the branchs SMEs credit quality

4. Research subject and scope: Subject: BIDV Thanh Xuan Time: year 2011 to 2013 Scope: BIDV Thanh Xuans credit activities involving SMEs

5. Research methods:6. Research structure:My thesis will be consist of 3 main parts: introduction, body, and conclusion. Furthermore, in part 2, the main body of the thesis, it is divided into 3 chapters: Chapter 1: Overview of credit quality for SMEs in commercial banks Chapter 2: Current situation of credit quality for SMEs in BIDV Thanh Xuan branch Chapter 3: Solution for improving the credit quality for SMEs at BIDV Thanh Xuan branch

CHAPTER 2: LITERATURE REVIEW OF CREDIT QUALITY FOR SMES IN COMMERCIAL BANKS

1. Credit activity at Commercial Banks:

a) General information about commercial banks:i) Definition of commercial banks:Commercial banks are the most important financial institution in the economy. Banks are diversified in types depends on the development of the economy and financial system; and commercial banks take the larger side of the scale in total assets, market shares, and numbers. A commercial bank provides services such as deposits, giving business loans and auto loans, mortgage lending, and basic investment products like saving account and certificates of deposit.Commercial banks are considered the most essential financial institution for its role as the financial intermediary, which includes monitoring the flow of money, creating and completing payment methods, keeping the balance between other economic entity.

ii) The role of commercial banks: Credit intermediaries: As a credit intermediary, commercial banks act as a bridge between those with excess money and those in need of capital. Consequently, banks become both a money borrower and a lender, and enjoy the interest income. This service that commercial banks offer brings mutual benefits to both depositors and customers. Payment intermediaries: Commercial banks also have the role of a cashier making payments for their customers various needs. The money used to make payments is extracted from customers accounts to make purchase of goods, services, transferring between accounts Customers can choose from many kinds of payment methods like credit cards, checks, ATMs These services have greatly improved the way we use our money as it makes payments much safer much more convenient, thus enable the economy to develop at a much faster pace. Creating money: Creating money is an essential role of commercial banks that truly reflects the nature of their existence. With the money deposited in the banks, they only have to keep a portion of it in the vault, called required reserves; the banks can then lend out their excess reserves out to the economy. Each loan made will generate more money, virtually creating it from thin air.

iii) The main activities of commercial banks: Capital mobilization: One of the two most basic activities of commercial banks. The capital raised is the main capital used in commercial banks other activities. Banks accept deposits from residents and economic entity to use in their business; therefore, these capital are the banks liabilities. Credit activity: The second of the two most basic activities of commercial banks. Credit activities are where commercial banks make the most of their profit, and these activities always take up the most portions in banks assets. Other activities: These activities may include services, international payments, credit card service or various type of agency.

b) Credit activity:i) Definition of credit and credit activity:Credit is understood differently depending on the research perspective. In a financial perspective, it is a property transaction on the basis of reimbursement between two entities. In the perspective of the research topic, credit is the economic relationship between the lender (the bank) and the borrower (organizations or individuals), in which the lender transfer the value of assets, money to the borrower to use in a certain time. The borrower then has the responsibility to repay the principal amount along with interest or any other financial charges. This act of lending and repaying is often called credit activities.Credit activity is one of the most important activities in commercial banks as it is associated with the production and circulation of the economy.

ii) Types of credit in commercial banks: Based on term: Short-term credit: credits with term under 1 year (under 2 years in some countries), is used to temporary generate additional working capital in organization or for personal uses. Medium-term credit: credits with term from 1 to 5 years, is often used to purchase fixed assets, renovation, expand operation, or invest in small and medium construction projects Long-term credit: credits with term over 5 years, is used for major investment, such as for basic constructions, new facilities, infrastructures, expand operation in large scope. Based on object of credit: Working capital credit: used to form working capital of economic entity Fixed capital credit: used to form fixed assets, which is basically investment in production line, facilities, or plants and equipment Based on use: Credit for production and circulation of goods: mostly for enterprises and organizations that specialized in producing and distributing goods. Consumer credit: credit for individuals, mostly applies for personal purposes Based on level of security: Secured credit: loans which have collaterals Non-secured credit: loans which do not have collaterals Based on origin: Direct credit: credit activity from the money lender to the money borrower without any intermediaries in between Indirect credit: credit activity with any sort of financial intermediaries like commercial banks or other entity.

2. Small and medium enterprises in Vietnam:

i. Definition of Small and medium enterprise (SME)Small and medium enterprise (SME) is an essential section of the economy worldwide. In term of determining whether an organization is an SME, each country has its own way of qualifying an SME; but overall, we usually look into three aspects: Its amount of investment into plants, equipment and facilities. Its number of work force. Its size of production and revenue.Alternatively, there are other qualitative determinants such as its structure, number of managers, and field of business.In Vietnam, in order to be qualified as an SME, an organization must have the capital of less than 10 billion VND or has an annual workforce of less than 300 people. More specifically, there can be three types of enterprises that are categorized as SMEs: Micro enterprises: the smallest type, which consists of only 10 or less employees each year. Small enterprises: enterprises which have from 10 to 200 employees each year Medium enterprises: the largest of 3 types, must have the annual workforce of 200 to 300 employees per year.The details were stated in Decree 56/2009/N-CP on 30/6/2009 and has been in effect nation-wide up until now.In conclusion, the term SME is used to refer to a group of economic entity with small and medium scale of capital and workforce compare to the general level of the economy in each distinct country.

ii. Characteristics of SMEs in Vietnam:

In Vietnam, the number of SMEs exceeds 96% of the total number of organizations. SMEs in Vietnam currently have to deal with the disapproving and harsh economic environment, and the most puzzling problem at the moment is raising capital. Most SMEs struggle with the difficulty to gather capital to expand their operation, upgrade their facilities and workforceDespite the current situation, most experts agree that SMEs are still holding a more important role than those of the larger organization. A research made by WASME (World Association for Small and Medium Enterprises), 48 banks worldwide suggests that 38% banks consider SMEs more important than large enterprises; 47% of the banks said the two are equally important; and only 15% accept the dominating role of large organizations. This concludes that even thought they are having their disadvantages; SMEs still take up a crucial part of the economy. Now lets take a deeper look at the features of SMEs in Vietnam: Types of business: Due to their size and production scale, there are a lot of areas that SMEs cannot participate in. Their chosen field of business is usually light industry, commercial, or business in the service area. Market and competition: Most SMEs businesses involve larger enterprises, including material provision, distributing channels, or replicating markets with smaller scale and less complexity. For the SMEs, these markets are extremely competitive and volatile; their main competitors are not the bigger companies but rather those of the same scale. Competition among SMEs are unbelievably important because: These markets promote freedom in competition. Unlike the big markets, which are required by large enterprises and sometimes even need government protection, these smaller markets are swarmed with competitors (due to the fact that 96% organizations are SMEs), and these enterprises are flexible and adaptable to perfect competition. Therefore, there are very rare cases of monopolies in these markets. The SMEs can exploit the local potential. The SMEs are very proficient at utilizing the local resources and workforce to their needs due to their smaller scale of business. The SMEs competition helps balancing the development between different areas in a country. Because of their flexibility, SMEs can emerge from any provinces or cities, creating a vast variety of goods and markets. Additionally, their goods are mostly consumed domestically, therefore it greatly contributes to the development of local economy and the whole country.

iii. The role of SMEs in Vietnams economy:

It is undeniable that SMEs are the main drivers in the development of our economy due to its increasing number and involvement: Creating jobs and income: The remarkable expanding speed of SMEs in Vietnam has guaranteed a significant amount of jobs for local Vietnamese, and has greatly reduced unemployment. Economic analysts have recorded that at least 1 million jobs are created each year solely by SMEs in Vietnam, mostly are for untrained workforce. Attract idle capital from residents: SMEs are small and medium sized, and focus on a small local area at a time. Therefore, theyre able to attract the scattered capital among residents, creating a larger, more efficient sum of capital. Contribute in national GDP: Once again, because of the growth in number, SMEs are contributing to at least 40% of national GDP. This amount is momentous, and the competitions among SMEs also stimulate the economy, making it more energetic. Helps changing the economic structure: Many SMEs are established in countryside and rural area. Their involvement directly decreases agriculture occupations and increases industrial and service occupations. This leads to the shifting in Vietnamese economic structure toward industry and service.

However, we must not overlook the current limitations of SMEs in Vietnam: Firstly, SMEs in Vietnam is struggling in accessing capital from banks. Despite the recent policies in supporting capital for SMEs, many SMEs still encounter difficulty in various procedures. According to a survey conducted by the government, 55% of SMEs have had difficulties in the lending paperwork process, 50% had trouble with providing collaterals, 80% reported that the interest rate was not appropriate. Moreover, only 30% of SMEs are able to access the capital from commercial banks, which is a shocking number for our economy, and further prove that banks must renovate their policies and system in favor of SMEs quickly. Secondly, a major proportion of SMEs in Vietnam lack the proficiency and technology to perform their business efficiently. The number of experts or highly educated staffs is extremely scarce, only takes up 0.025% of total employees. A poor quality of workforce has drastically reduced the quality of their business. Thirdly, due to the recent economic recession, the production and turnover ratios of SMEs are at a dangerously low level. In the several recent years, the buying power of consumers has severely diminished, enterprises had to trim down their scale and production, many eventually went bankrupt. Lastly, SMEs in Vietnam are slow in realizing governments documents and declarations. They often show little effort in researching government and international policies (which is also important due to the rising globalization of Vietnam). This is a weakness that shows that SMEs in Vietnam are awfully irresponsible and impractical.

3. Credit quality for SMEs in commercial banks:

a) Definition of credit quality for SMEs:Credit activities quality for SMEs is the efficient response to the need of capital for SMEs from the commercial banks, and the effectiveness of the loaned capital in the process of business activities in order to generate the most revenue, enough to repay the loan to the banks before its due and also generate profit.

b) How to evaluate credit quality for SMEs

Qualitative evaluation: Customers satisfaction: As mentioned above, credit quality is measured by the efficiency in responding to SMEs capital need. This factor is shown by how timely are the SMEs needs are met. Each type of SMEs has a different capital demand as well as credit terms and credit method. Consequently, banks need to diversify their credit activities and adapt to the SMEs need. Contribution in developing the economy: Alongside with the previous factor, the capital received by the SMEs must deliver a mean for the development of the economy. This can be broken down to expansion of production, technological upgrade, and unemployment reduction.

Quantitative evaluation: Overdue debt: This indicator reflects how risky are the loans of the bank.

This ratio measures the risk and, more broadly, the quality of the loan. Most of the overdue debts are problematic. The higher the ratio, the lesser the banks credit quality. Bad debt: Bad debt is another indicator that sides with overdue debt. Both indicators need to be evaluated in order to analyze a banks credit quality.

According to Decision 18/2007/QD-NHNN and Decision 493/2005/QD-NHNN, a banks debts can be divided into 5 categories with the highest rank is 1 Pass, 2- Special-mention, 3 sub-standard, 4 doubtful, and 5 loss. Bad debts are debts that are ranked in categories 3 to 5. Current debts/passed debt: Debts that are not due and the borrower is able to pay the principal and interest in full and in a timely manner. Special-mention debts: Debts that are overdue less than 90 days and rescheduled debts that are not due. Loan to deposit ratio:

Credit turnover:

Profit from credit activities: Generating profit is the banks sole purpose, and profit from credit activities will determine its credit quality:

c) Factors affect credit quality for SMEs: From the banks: Credit policy: Every bank has its own credit policies in order to achieve its goals. These policies serve as guidelines and directly determine the size, characteristic and quality of the loans made by the bank. Therefore, this factor must be rational and intelligent. Credit risk management: The banks credit evaluation procedure is a crucial task in deciding its customers. This process will settle the banks credit risk and more importantly, its profit. Therefore, this process must be analyzed and optimized to ensure the efficiency of the loans, as well as enable the more competent enterprises access to the capital they need. Employees proficiency: Human resources is a vital asset in any field of business, especially in banking and finance. Credit activities require excellent skills, observation, and business ethics. Banks technology: Information technology is rising to become a major influence in any kind of business. Theyre definitely going to affect the quality of the banks activities and their quality. From the enterprises: Proficiency: No matter how well a company is funded, it cannot thrive without an expertise and a good system. These characteristics will impact on how the raised capital is used, and how it is used will determine the efficiency of the bank credit. Business project quality: A feasible project with high profitability will ensure the credit quality of the bank. Therefore, when granting a loan, the bank must consider a companies future projects and direction. Quality of managers: The managers are the ones who make the important decisions within a company. They also help shape the characteristics of the organization as well as its direction and strategies. A good management system is a must when assessing a credit customer. Financial status: A strong financial capacity is expressed in the volume of equity and the proportion of total used capital, which will prevent SMEs from many difficulty and risks of market fluctuation. Collaterals: Business operations will always have to face the risk of the unexpected, which will eventually make the loan insolvent. Therefore, sufficient collaterals and other secured assets of the company must be evaluated before granting a loan. Other objective factors: Economic environment: Every kinds of business is affected by the economic environment. Banks and SMEs prefer a stable economy for it allows enterprises to do business more effectively, leading to more demand for capital, and consequently creating more opportunities for credit activities from banks. However, an unstable economy will greatly reduce credit expansion from banks; inflation will stale operations, and reduce credit quality. Thus, commercial banks and SMEs must be cautious and always analyze and predict the market fluctuation. Legal environment: The laws are made to ensure the efficiency and transparency of the operation. Banks and enterprise should be aware of and have a synchronized legal framework, and high credit quality can only be achieved when both entity obey the law. Political environment: Similar to economic environment, a stable political environment will promote a prosperous business environment, increasing credit supply and demand. A risky political environment with potential of military coups, newly elected government, war or terrorism will only severely decline the credit quality of the bank.

CHAPTER 3: STATUS OF CREDIT ACTIVITIES FOR SMALL AND MEDIUM ENTERPRISES IN BIDV THANH XUAN

1. Introduction about BIDV Thanh Xuan brancha. FoundationBIDV Thanh Xuan is referred to as Joinstock Commercial Bank for investment and Development of Vietnam Thanh Xuan Branch as its international transaction name. It is one of BIDVs newest branches and went into operation in 2009. It is located at no. 1 Nguyen Huy Tuong Street, Thanh Xuan District, Hanoi. BIDV Thanh Xuan is one of BIDVs enormous networks of 118 branches scattered across Vietnam. This branch is operated by human resources of over 300 staffs and employees, who are graduates and post-graduates from many renowned universities in Vietnam. BIDV Thanh Xuan Branch is often recognized as one the networks largest, most modern, as well as a remarkably well-performed branch. Over the recent years, BIDV Thanh Xuan Branch has gradually gained credence and reliance from customers.

b. Organization structure

The branch is divided into five main departments, each with its own objectives:Customer relationship Identify and approach potential individual or companies and institutions customers through marketing, public relation activities Give suggestions and solutions for customers about credit limit issues, policies and simultaneously advice them in using loans, collateral Introduce and provide retail banking services Collect and evaluate customers information to receive loan proposals Classify debts, credit ranking and assess customers operation.Risk management Supply credit policy and support the working process. Suggest credit adjustment and handle to bad debt Manage potential risks related to credit portfolio and risks in the operating systemOperation Credit administration: manage operation and lending as well as guarantee the unity and validity of lending profiles before accepting credit proposal Customer Service: manage customers accounts, make direct transactions and receive comments and suggestions from customers; also has the job to prevent money laundering for additional transaction Banknote and vault: administer the banks cash and other cash equivalent such as gold, collateral documents, valuable notesInternal Affairs Administrative office: In charge of keeping the banks staff profiles confidential, recruit and train new employees, do salary payments; also make rules and regulations of the branch and set up internal activities Accounting Finance: head of accounting and finance activities, check and find errors in all business activities and submit quarterly, annual reports Planning: find and collect social, political, economic information related to competitiveness and business progress of the branch; make short term and long term business plan for each department.Subsidiaries Transaction office: Do all credit activities and banking services such as lending and transferring money, disbursing loans, foreign exchange; also mobilize fund from different channels like valuable notes, deposits and foreign currencies.c. Products and services:

Fund mobilization Target customers are individuals, enterprises and financial institutions Types of products: time deposits, demand deposits, valuable papers. Additionally, the branch also accepts deposits for treasury, security investment or deposits for special proposed capital.Credit activities Target customers are also individuals, enterprises and financial institutions. Types of products include business loans, individual credit, employee credit, and mortgage credit.Other products and services Card services: supports international and domestic debit cards. Guarantee services: accepts to write guarantee contracts to help guarantee the financial obligation for its customers. Consulting services: the branch supports verification services, advices on investment, payment, financing, information about current markets, partners,...etc.

d. Overall business result of BIDV Thanh Xuan from 2011 to 2013:

i. Capital mobilizationTotal mobilized capital:201120122013

Total deposit (billion VND)430355006800

We can easily see an upward trend in total fund mobilized from 2011 to 2013 in the table above. From 2011 to 2013, the branch has approximately doubled their deposits each year. In 2011, they raised 4303 billion VND, then the number jumped impressively to 5500 billion in 2011, then exceeded 6800 billion in 2012. The numbers showed an amazing growth rate of 178% and 128% in 2012 and 2013 respectively. Although total fund mobilization is not rising as fast as the previous years, it can be assured that the branch is doing extremely well on raising its capital.

According to the chart above, it seems that BIDV Thanh Xuan Branch is having a good balance of depositors, which are residents and economic entities. Proportions are divided by 41% residents deposit and 59% economic entities deposit. Toward 2013 the percentages have balanced out perfectly between these two types of customers. It seems that BIDV Thanh Xuan was running good customers policies to attract more deposits from the residential area; these types of deposit are very valuable due to fact that many commercial banks were violating the SBV regulation in interest rate policies to reduce the fair competitiveness in fund raising in the particular time period.On the other hand, the majority of deposits are term deposit, which accounted for more than 80% of the deposits. This figure is reasonable because term deposits are extremely safe and therefore appeal to every investor.

ii. Credit activityGeneral201120122013

loan for individual229276277

percentage10.10%9.60%8.40%

loan for organizations202326243023

percentage89.90%90.40%91.60%

total outstanding loan225229003300

Table: Total outstanding loans

Credit activities, along with raising captital, play a crucial role in the banking business. Below is a diagram of BIDV Thanh Xuans total outstanding loans in billion VND from 2011 to 2013.The figures described a sharp rise from 2252 billion VND of loans to 2900 billions in 2012 (156% increase), and the number abruptly reached 3300 billion VND of loans in 2013 (129% increase). This upward trend clearly shows the branchs scale of business has expanded rapidly in just a three years period.

In term of loan structure, we can see a slight domination of short term loans over the medium and long term loans, which is approximately 58%, 67% and 60% in 2011, 2012, and 2013 respectively. However, when we take a closer look, it seems the branch has implemented its policies effectively to balance its loan structure. The numbers are shown in the figure below.

Loan to deposit ratio:201120122013

Outstanding loans225229003300

Mobilized fund430355006800

LTD59.6%52.3%52.7%

Table: Loan to deposit ratio (Unit: billion VND)

The Loan to Deposit ratio (LTD) shows how a bank utilizes its capital in its loans. As perceived in the table above, the branchs LTD ratio is at the moderate level and tends to stay at a very stable state. Different opinions would suggest that this branch is handling its capital extremely well, loaning out money not too much, and to the right customers, keeping risks at a controllable rate. This means the branch is able to lend out money without having to worry about sudden withdrawals from customers by having sufficient reserved cash. At the same time, BIDV Thanh Xuan keeping its bad debts ratio (or non-performing loans) relatively low (this might be due to the fact that the branch is still freshly opened and the majority of loans are short-term loans) while expanding its business size. Yet, the bad debt percentage is rising steadily from 0% to 0.015% in 2012 and 0.04% in 2013. Overall, despite some minor flaws, the branchs efficiency in credit activities is currently over the top.

iii. Profit

201120122013

Total asset458158007262

Income before tax94.38150135.3

Table: Income before tax (Unit: billion VND)

It is easily noticeable that BIDV Thanh Xuan Branchs total assets and profit before tax are rising rapidly. The branchs total assets has increased from 4581 billion VND to 7262 billion VND, which is more than doubled, in just three years from 2011 to 2013. Similarly, their profit before tax had a huge surge from 94.38 billion VND in 2011 to 150 billion VND in 2012, and to 135.3 billion VND in 2013 subsequently. In term of growth rate, the branchs total assets had a growth rate of 126% and 125% in 2012 and 2013 consecutively; their profit before tax, not surprisingly, also had a very high growth rate in 2011 and 2012 with 159% and -9.8% respectively. Overall, it is agreeable that BIDV Thanh Xuan is having remarkable performances over the last three years; all statistical numbers are in their favors and the branch was considered one of the best-performing divisions of the networks. In my personal forecast, I tend to assume this branch will continue to thrive in the next few years. However, they must be aware that by having such sharp growth, the growth speed will definitely decrease in the near future due to diminishing returns. Nevertheless, the upward trend will continue to accommodate their performances and numbers.

2. Current situation of credit quality for SMEs:a. Status of credit activities for SMEs:

Scale of credit for SMEs:

SMEs are no doubt important assets of the economy, and the most potential customers for commercial banks. As mentioned above, the main obstacle that hinders the expansion of these enterprises is the lack of capital. Therefore, it is crucial that commercial banks focus on broaden their scale of credit for SMEs.Below is a table describing the percentage of outstanding loan for SMEs in BIDV Thanh Xuan from 2011 to 2013.

201120122013

total outstanding loan225229003300

loan for SME1767.822293.92706

percentage78.5%79.1%82.0%

Table: outstanding loans for SMEs (Unit: billion VND)

It is easily visible that most of the branchs outstanding loans are from SMEs, always around 80% of the total outstanding loans. This is a positive sign for it shows that BIDV Thanh Xuan is currently focusing on the right customers in its credit activity. Evidently, we can perceive a slight increase in percentage of loans for SMEs from 2011 to 2013, from 78.5% to 82%. In 2011, the overall economy of Vietnam was in a recession, many companies struggled and many eventually went bankrupt because commercial banks tightened their policies on credit activities. The economy found itself recovering from 2013 and up until now, it is nearly fully recovered. Perhaps it was the main reason for the increase in loan volume for SMEs in recent years.Another reason behind this movement in credit scale for SMEs is the implementation of BIDVs numerous incentive programs for SMEs. These programs began after the governments Decree 90/2011/ND-CP about promoting the support for SMEs in Vietnam.One of the most recent incentive programs for SMEs in BIDV is the interest rate incentive program started earlier this year, on 21/1/2014. The program includes a credit package of 3000 billion VND, and will reduce the annual interest rate for SMEs to up to 8% when they borrow money from the BIDV network.

Credit for SMEs based on term

201120122013

total loan for SME176822942706

short-term87.40%87.70%86.90%

medium and long term12.60%12.30%13.10%

Table: credit for SMEs based on term (Unit: billion VND)

The chart above conveys the credit structure for SMEs in BIDV Thanh Xuan from 2011 to 2013 based on the term of the loan. Overall, the majority of the loans for SMEs are short-term loan, and the proportion fluctuated from 2011 to 2013. Throughout the years from 2011 to 2013, most of BIDV Thanh Xuans outstanding loans for SMEs are short-term loans. In 2011, the total loan volume for SMEs was 1768 billion VND and among this capital 1545 billion VND was deemed short-term (approximately 87.4% of total loan volume). The dominance of short-term loans for SMEs still exist up until 2013 with about 86.9% (2351 billion of 2706 billion VND) of the total volume. However, during these three years, we can see a slight increase in the amount of medium and long term loans for SMEs, from about 12.6% to roughly 13.1% in 2013, which is a positive sign and will be explained below. In term of efficiency, the branch is taking the right steps toward a more beneficial loan structure for SMEs. This can be justified based on the differences between short-term and medium-and-long term loans for SMEs.SMEs most preferred type of loans are medium and long term loans because they need the capital to start medium and long term projects, purchase plants and equipment, purchase fixed assets, upgrading manufacturing lines, and improve technology. However, as observed from the chart above, SMEs are currently unable to approach these types of capital. Instead, these types of capital are being pulled toward bigger, more prestigious enterprises with huge amount of assets and collaterals. More reasons behind this fact is because most SMEs cannot afford the amount of transparency required by banks credit risk system, and also most SME dont have sufficient collaterals to insure their medium and long term projects like larger enterprises.Nevertheless, in 2013, we can see a slight improvement in the credit structure with medium and long term loans rose to 355 billion VND (roughly 13.1% of total loan volume). This particular sign shows that BIDV Thanh Xuan is moving toward the right path in improving their credit quality for SMEs, although more effort is definitely needed.

Credit for SME based on customers type of business

201120122013

Construction and industry169200273

Manufacturing129174135

Commercial and service147019202298

Total outstanding loans for SMEs176822942706

Table: credit for SMEs based on type of business (Unit: billion VND)

The graph describes the credit structure for SMEs in BIDV Thanh Xuan from 2011 to 2013 based on the companies type of business. The most outstanding feature of this graph is that the majority of the outstanding loans in BIDV belong to the commercial service area in all three observed years.Overall, SMEs that borrow capital from BIDV Thanh Xuan is very diverse in types of business. However, there are businesses that are dominating others in term of loan volume. The outstanding loans for SMEs in the field of commercial and service area are taking up the majority with 83.14% in 2011, 83.71% in 2012, and 84.9% in 2013; follow up are the loans for SMEs in the construction and industry business which fluctuated from 8.7% to around 10.10% of the total loan volume. Finally, the SMEs in the field of manufacturing and processing take up the remaining proportion of the chart.It is plausible that commercial and services are having the largest part in loan volume because these businesses are on their growth peak and also possesses extremely enormous markets, completely dominate the other two types. Nevertheless, BIDV Thanh Xuan is choosing the right customers who are having the most potential turnover rate, and the branch will certainly make profit in the future.

Loan to deposit ratio for SMEs

201120122013

total outstanding loans for SMEs176822942706

total mobilized capital430355006800

loan to deposit ratio41.1%41.7%39.8%

Table: SMEs loan to deposit ratio (Unit: billion VND)

Similar to the Loan to Deposit ratio (LTD) from the previous section, these LTD ratios show how BIDV Thanh Xuan branch utilizes its capital in its loans for SMEs.In general, we can see a downward trend in LTD ratio for SMEs from 2011 to 2013. More specifically, in 2011 the LTD ratio was 41.1%, the number then rose steadily to 41.7% in 2012 before finally dropped to 39.8% in 2013. If we look at these numbers in an economic view, itd mean that BIDV Thanh Xuan is not performing well. Although the percentage is quite high, the decreasing trend shows that the branch is not using its mobilized capital efficiently for SMEs credit. In other words, the credit activities for SMEs in BIDV Thanh Xuan is currently not commensurate to the branchs mobilized capital, and the potential for these credit could exceed much more than these numbers. The reason for this might be the hesitation in making loans for SMEs due to the recent economic recession, or perhaps the inability to efficiently evaluate the customers from the branchs inner credit risk management team.Overall, the percentage still shows that the branch is not too neglectful at utilizing its capital for SMEs. However, it can certainly use some improvement in this area, particularly prioritizing SMEs in lending medium and long term capital for investment in large scale projects.

Credit turnover

201120122013

SMEs Debt recovery revenue141419502598

Total outstanding loans for SMEs176822942706

Credit turnover ratio for SMEs0.80.850.96

Table: SMEs credit turnover ratio (Unit: billion VND)The chart above shows the credit turnover ratio of the loans for SMEs in BIDV Thanh Xuan branch from 2011 to 2013. Credit turnover ratio is an important indicator to measure how effective is the banks ability to recover its loans. In general, the credit turnover ratio in BIDV Thanh Xuan is growing rapidly from 2011 to 2013.It is easily noticeable that BIDV Thanh Xuans credit turnover ratio is fairly high. In 2011 it already started out with 80%, the figure continue to rise to 85% in 2012 when finally tops at 96% in 2013. Due to the fact that the scale of credit for SMEs in BIDV Thanh Xuan has also been increasing, the growth of this credit turnover ratio is truly an accomplishment for the branch. In the last three years, BIDV Thanh Xuan has been working effectively in its debt collecting process, successfully collect debts in a timely manner and ultimately improve the branchs profitability.

201120122013

Income from SMEs credit71128121

Total income 94.38150135.3

%75.50%85.20%89.30%

Table: Income from credit from SMEs (Unit: billion VND)

The above chart explains the profit percentage from loans for SMEs over total income of the branch. Although the branchs income staled in 2013, the percentage of profit earned from SMEs still showed an upward trend from 2011 to 2013.It is reasonable for BIDV Thanh Xuans moderate income in 2011 because it was the time of the economic recession in Vietnam. During that time, many enterprises went bankrupt and commercial banks had to stricken their lending policies to minimize loss. However, it seems that BIDV Thanh Xuans income proportion from SMEs has been growing indefinitely throughout the observed years. Despite the heat of competition from other commercial banks, BIDV Thanh Xuan still managed to scored 123 billion VND and 121 billion VND as profit in 2012 and 2013 (approximately 85.2% and 89.3% respectively). The increase in this ratio has clearly shown signs that the branchs credit quality for SMEs is increasing.

Overdue and bad debts for SMEs

201120122013

Overdue debt for SME106134142

Total outstanding loans for SME176822942706

Overdue debt/total outstanding loan5.98%5.83%5.24%

Table: Overdue debt for SMEs (Unit: billion VND)

Overdue debts are any debts that are not recovered within the agreed time from the enterprises. One of the most essential tools to evaluate any banks credit quality is the amount of overdue debts. The given chart depicts the overdue debts of SMEs compare to total outstanding loans in BIDV Thanh Xuan from 2011 to 2013, and the figure seems to be stable while having minor reduction throughout the years.As mentioned from the previous sections, we can see that the branchs credit scale for SMEs has been increasing since 2011. Therefore, it is reasonable that other statistics, like the amount of overdue debts itself, would be on the rise. However, from the figure above, we can see the total opposite. In 2011, the branchs overdue debt was 106 billion VND, about 6% of total loans for SMEs. In 2012 it decreases to 5.83% and in 2013 it was only 5.24% of the total loans for SMEs. Despite the growing scale of credit for SMEs, the branch still managed to reduce the amount of overdue debts for these customers, which clearly showed that BIDV Thanh Xuan was functioning pretty well in that time in realizing and implementing strategies to reduce bad debts. However, when we take a closer look, the branchs overdue debts rate was always above 5%, which was still out of the governments accepted number. The overdue loans were mainly focused in the construction sector, and the main cause of this problem is that the overdue loans came from many loans without collateral. This again raised the issue about the proportion of secured credit in the branch. However, with the close guidance and the effective leadership of the management team, the branch has managed to reduce its overdue loans ratio over the years. In short, these number shows that BIDV Thanh Xuans loan quality is still at an alarming rate, even after they have been improving it.It is agreed that credit activities for SMEs is important and profitable, but still contains a lot of risk. BIDV Thanh Xuan need to upgrade its credit risk system in order to better evaluate customers and their projects.

b. Evaluation of credit quality for SMEsi) Achievements:

Through analyzing the situation of BIDV Thanh Xuan above, it is clear that the branch has acquired certain important achievements in its overall business activity and more specifically its credit activity for SMEs.

The branch has been performing exceptionally well in its capital mobilization activity. The growth rates over the observed years were incredible, and the capital structure has also improved. The capital raised enabled the branch to support its rapidly growing credit activity. This achievement is the result of BIDV Thanh Xuans effective measure of information broadcasting and regular advertisement for local deposit customers.

One of the most noticeable achievements of BIDV Thanh Xuan branch is the expansion of credit activity for SMEs. From 2011 to 2013, the size and scale of credit for SMEs has increased remarkably and the branch has made its reputation among local SMEs. The branch has gradually developed its market shares, sustainably mobilize local capital efficiently to be able to provide a tremendous amount of cash for SMEs businesses and investments.

The overall credit quality for SMEs has been improved. All the numbers suggest that the branchs credit structure is improving, in both business types and loan terms. The amount of overdue debts still needs close supervision but has shown positive signs. Along with proper attention to quality and performance of each loan, the branch also regularly reviews and analyzes them meticulously, accurately execute loan classification in order to assess debts and set provision for loan loss accordingly. In short, BIDV Thanh Xuan has shown that theyre paying adequate attention to credit quality of SMEs.Along with the adequate attention, BIDV Thanh Xuan has also made progress in its credit policies and has gained considerable achievements. These achievements are expressed through the proper objectives and guidelines at the right time. Thanks to these guidelines, the branch has made adjustments of outstanding credit, credit structures, and loan priorities for SMEs effectively.

In brief, during the time from 2011 to 2013, BIDV Thanh Xuan has proven to be one of the fastest growing branches in the whole BIDV networks. Although the branch was only established for a few years, its achievements are recognized among other larger local commercial banks, and have done a great deal in expanding the BIDV networks and reputation.

ii) Limitations:

On the other hands, we must not overlook the limitations that are still present in BIDV Thanh Xuan at the moment.

Firstly, the branchs credit activity for SMEs is not currently matching its potential, or in other words, the branch is not utilizing its capital for SMEs lending effectively, its loan to deposit ratio suggested this fact. The branchs loan to deposit ratio for SMEs, although not unusually low, has been in a downward trend over the years, hitting 39.8% in 2013. This obviously shows that the branch still has some hesitation for loans involving SMEs, and this decreasing numbers may directly affect the branchs total profit.

Secondly, the ability to suffice the medium and long term loans for SMEs is still limited. The majority of the loans are still short term while the medium and long term rate is floating around 12% (although has shown some sign of increasing). The medium and long term loans are more necessary for SMEs to expand their size and production, to improve the economy as a whole, and invest in larger projects. Therefore, the branch need to immediately find a way to fix this problem.

Thirdly, there is still risk in the loans for SMEs. The rate of overdue debts for SMEs is not increasing, but is still hanging at a dangerous level (above 5%). Making loans for SMEs are not only complicated and require a lot of effort in analyzing and evaluating risk from customers, but is also extremely time-consuming. Therefore, the branch need to improve its credit risk management to not only reduce loan risks, but also to be able to support the more potential SMEs customers.

Causes: From the branchThere are several restrains in the branchs credit policies and the credit risk management teams. The credit risk management process is always a complicated and time-consuming task in the whole banking activities. BIDV Thanh Xuan has not been performing well in this process, which eventually led to the high overdue debts ratio. Having a sharp market observation and economic prediction, along with meticulous customer analysis is a crucial requirement for any commercial banks, especially in the current sporadic economic situation. Another consequence of this hole is the disorganized credit structure. The inability to thoroughly evaluate a borrower and their projects will result in a huge rise in risk or even a miss of potential customer. In addition, the process of supervising customers after loan agreement is still in a halt, many cases this activity proved to be unenthusiastic and negligent, which can lead to unexpected use of the borrowed capital. The branch also showed the incompetence to focus on market accessibility and understanding the needs of customers, which are the SMEs. The branch did not make full use of its marketing, media promotion and other channels to communicate with SMEs. Consequently, it led to confusion and the inability to perceive the needs of their SMEs customers.

From the SMEsThe most deadly error that SMEs make is the lack of transparency in their business. Due to the harsh competition and the shortage of knowledge and technology, many enterprises produced a dishonest financial statement, or often inaccurate. These actions alone are prohibited in the legal environment, but it also result in the failure to asset customers from commercial banks, which eventually lead to their distrust and prejudice. Many SMEs are currently lacking of collateral for loans. This problem also contributes to the hesitation to approve loan from the banks.SMEs in Vietnam are still at a moderate or low level of expertise and quality, especially SMEs from rural regions. Over the recent years, due to the economic recession, many SMEs in Vietnam have collapsed. Many SMEs are failing to make profit, plummeting in production, and have a critically low turnover ratio. Also, a large proportion of the workforce are untrained or inexperienced. The quantity of highly educated workers is limited, with only 37.82% employees graduated from university or higher education. In addition, many SMEs havent had insurance policies for workers, thus further reducing their working quality.

Other macro factorsWe also must not overlook other macro factors that affect every components of the economy. For instance, in recent years, due to the complicated economic situation both domestically and globally, enterprises and commercial banks have faced many difficulties. Tight credit policies, limitation of disbursement, and especially the fall of consumers buying power have seriously affected the capital supply for banks and consequently their revenue. On the other hand, enterprises are faced with increasing cost and insolvency due to the rising interest rate. Furthermore, the continuous fluctuation in the price of gold, dollars, real estate market and the stock market has directly affected the credit operations and quality of the whole banking network in Vietnam.In addition, loopholes in the government system have led to several business inefficiencies, and the inability to make loan repayment, which further make commercial banks reluctant to approve loans for SMEs. In particular, the government has no specific regulations on the financial accounting regime, or any detailed guidelines for SMEs. These factors subsequently create a negative impact on the development of SMEs and commercial banks.

Chapter 4: Solution for improving

1. Orientation of development for BIDV Thanh Xuan

BIDV is planning its way to become one of twenty modern banks that have extremely high quality, efficiency and reputation in South East Asia. The prestigious bank is focusing on 3 main strategies in order to achieve this title by 2020:1. Complete the professional and effective organizational structure. The business processes, government regulations, and coordination between units have direction to products and customers according to the best international standards.2. Develop a high quality human resources based on the use and development of experts domestic and international standards as the core reliance for stable and sustainable development.3. Enhance the capacity of operators, technology applications in banking activities to generate breakthrough and release of labor, increase the spread of science and technology to all business activities in the BIDV network.

In order to implement the above strategies, BIDV has announced the overall objectives for the whole network: Develop and improve organizational and management structure, improve the operating capacity at all level of BIDV; create a solid foundation for the bank to grow into the leading financial corporation in Vietnam. Focus on a comprehensive restructuring of the business to improve the efficiency and to maintain quality, and always be active in risk management and sustainable growth. Maintains and develops the BIDVs position and influence in financial markets, becomes the pioneers in implementing national monetary policies. Improve the capacity in risk management; apply and manage according to the best practices in consistent with the business situation of Vietnam. Develop retail banking activities, hold a large share of outstanding loans, raise capital and retail service. Strengthen the capacity of using applications and technology in business activities. Develop a high quality human resources, professional force in order to improve labor productivity. Protect, maintain, and promote the core values, building corporate culture and further polish the BIDV brand.

Over the past 4 years, BIDV Thanh Xuan has archived significant results, which became a pretty solid foundation for the next step. All officers and employees of the branch upheld the spirit of responsibility, and always maintained the unity in order to develop the branch. In the current socio-economic environment, combined with the results of the year 2013, BIDV Thanh Xuan has announced certain orientations of development as follow:

CategoryTargetGrowth compared to 2013

Total outstanding loans188736.54%

Average outstanding loans135028.33%

Total mobilized capital75017.37%

Average mobilized capital45012.78%

Bad debt ratio