VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS HOANG THI THU HUONG IMPROVING LENDING ACTIVITIES FOR SMALL AND MEDIUM ENTERPRISES IN MILITARY COMMERCIAL JOINT STOCK BANK Major: Business Administration Code: 60 34 05 MASTER OF BUSINESS ADMINISTRATION THESIS SUMMARY Supervisors: Dr. Nguyen Viet Dung Hanoi – 2011 TABLE OF CONTENTS ACKNOWLEDGEMENTS. iv TABLE OF CONTENTS.vi LIST OF ABBREVIATIONS.viii LIST OF TABLES. RESEARCH PROBLEM AND OBJECTIVES.
RESEARCH SCOPE AND LIMITATIONS.4 CHAPTER 1: LENDING ACTIVITIES FOR SMES IN COMMERCIAL BANKS.1 OVERVIEW OF SMES.1 Definition of SMEs.2 Features of SMEs.3 SMEs’s role in the economy.2 LENDING ACTIVITIES FOR SMES IN COMMERCIAL BANKS.1 Overview of lending activities in commercial banks.2 Lending activities for SMEs in commercial banks.3 FACTORS AFFECTING LENDING ACTIVITIES FOR SMES OF COMMERCIAL BANKS. 27 CHAPTER 2: LENDING ACTIVITIES FOR SMES IN MILITARY BANK.1 OVERVIEW OF MILITARY BANK.1 Establishment and development process.2 Organization model and business activities.3 Credit Risk Management of Military Bank.4 Current business performance.2 LENDING ACTIVITIES FOR SMES IN MILITARY BANK.3 ASSESSING LENDING ACTIVITIES FOR SMES IN MILITARY BANK.2 The existing problems and causes.33 CHAPTER 3: SOLUTIONS AND RECOMMENDATIONS TO IMPROVE THE SMES LENDING ACTIVITIES IN MILITARY BANK.1 THE DEVELOPMENT ORIENTATION OF LENDING ACTIVITIES IN MILITARY BANK.2 SOLUTIONS TO IMPROVE LENDING ACTIVITIES FOR SMES IN MILITARY BANK.1 Military Bank should keep SME loans growing at safer and more stable pace .2 Improving credit policy and process of lending activities.3 Improving quality of justification in making credit decision.4 Setting a reasonable interest rate.5 Improving quality of human resource.6 Improving quality of information.7 Improving control, internal supervision and debt collection.8 Improving organization and management operation.1 Recommendations for Vietnam State Bank.2 Recommendations for Small and Medium Entrepreneurs. 4 vi LIST OF ABBREVIATIONS SBV State Bank of Viet Nam SMEs Small and Medium Enterprises LMEs Large Manufacturing Enterprises LBL Loans Balances WTO World Trade Organization FED Federal Reserves v LIST OF TABLES Table 2.1: Some financial indicators.2: Quantity of enterprises.3: Volume of loans for SMEs over the years.4: Outstanding loans for enterprises in Military Bank.6: Interest income from SMEs lending activities.7: Non-performance SMEs loans.8: SMEs collateral loans ratio.9: Structure of SMEs loans based on industry.10: Structure of SMEs loans based on term.11: Structure of SMEs loans based on sector.12: Structure of SMEs loans based on currency.13: Interest income on volume of SME loans.14: Turnover ratio of SME loans. Rationale Coming with the common tendency of development in the world, Vietnamese banking and finance industry is playing a more and more important role in prosperity of Vietnam economy.
When Vietnam officially integrated into the world economy and became the member of World Trade Organization, activities of Vietnamese commercial banks were very eventful and competitive in few years ago. Although the recent recession of the world economy was caused by multinational financial institutions like insurances, banks, securities. It’s difficult to deny the contributions of commercial banks in the past as well as in the coming future. Commercial bank is a financial intermediary in money - credit that supplies a series of important services helping the economy – subjects to join in payment quickly, save cost of buying and selling goods, grab the business opportunities, provide capital to ensure producing activity sustainable, create facilitations for enterprises and the economy.
In all of products and services or utilities which commercial bank supplies, lending activities always occupy the biggest percentage of total asset of commercial bank because of the importance and special characteristics of its. By lending activities, capital will be transferred from people who temporarily have surplus money to those who need money to invest in the economy in order to make profit for them or contribute to develop the economy. Moreover, this activity creates the biggest profit for Vietnamese commercial banks, ensures that Vietnamese commercial bank will exist, develop and become prosperous in the coming years. Therefore, when I mention about Vietnamese commercial banks, I mention about lending activities, but when I focus on lending activities, I would make consideration about lending activities in SMEs.
Lending activities for SMEs in Vietnamese commercial banks have been developing very quickly in recent years as SMEs are playing a very important role in solving employment problem, contributing to the growth of national economy, creating a competitive environment to spur commodity market and so on. Currently, many SMEs are in need of capital and the SMEs market is assessed to be very potential in the coming years. Yet, if these lending activities are not handled effectively, they cannot bring the 1 prosperity for commercial banks, not to say they can even make commercial banks collapse if borrowers cannot fulfil the repayment. Therefore, improving lending activities for SMEs is very important to commercial banks.
In Military Bank, the lending activities for SMEs are good in fundamentals. Yet, although the interest from loans and advances to small and medium customers has increased from year to year and occupied a bigger proportion of total loans (about 51%), it is still not big enough in comparison to the target of 60% set by the Board of Managers. Besides, there are still non-performance loans of SMEs in the balance sheet of Military Bank, it is below 5% but still should be considered. In addition, the pace of credit growth of Military Bank is too hot and not easy to manage whereas the ability of credit officers and credit-classified system still has limitations In short, it is necessary for Military Bank to find better ways to improve the lending activities for SMEs, which is the reason why my thesis would be “Improving Lending Activities for Small and Medium Enterprises in Military Bank”.
Research problem and objectives Research problem: My thesis studies the SMEs lending activities in commercial banks, especial in Military Bank. The research problem is how to improve the lending activities for SMEs in Military Bank. Research Objectives: With the above problem, this thesis would mention aspects of SMEs lending activities of commercial banks, particularly in Military Bank. Objectives of research would be understanding clearly the lending activities for SMEs in Military Bank, from that the research would find out the existing problems, causes, limitations and then make recommendations or solutions to improve the SMEs lending activities in Military Bank.
The summary of research objectives are: - Review theory of lending activities in commercial banks. - Clarify the SMEs lending activities in Military Bank. - Make solutions or recommendations to improve the SMEs lending activities in Military Bank. Research questions In order to have clearly, detail perception on SMEs lending activities of Military Bank and find out the best solutions for Military Bank, the thesis or report must answer some important questions related to the SMEs lending activities in Military Bank.
There are some mainly following questions: - What are the indicators used to assess SMEs lending activities in commercial bank? - How are the SMEs lending activities in Military Bank? - How do the customers feel about the SMEs lending products of Military Bank? - What are the factors that have significantly effected on the SMEs lending activities in Military Bank? - What should Military Bank do to improve its SMEs lending activities? 4.1 Data collection In this thesis, secondary data would be used. Mainly considered secondary data was taken from annual reports, financial reports, articles, websites, financial books and other previous researches… related to lending activities of Military Bank. The author went to the library and some Military Banks departments to collect secondary data.2 Data processing Basing on collected data, this thesis would coordinate some mainly methods like comparison, analysis, statistics, synthesis, mathematic model … to find out existing problems in SMEs lending activities at Military Bank, from that the causes and limitations were determined then the best recommendations would be made for Military Bank in improving SMEs lending activities. Research Scope and Limitations Scope: The thesis studied lending activities for SMEs in Military Bank and the research focused on the situation of these issues in the 2007 → 2010 period.
3 Limitation: Because the data which is used to analyse only in 2007, 2008, 2009 and 2010, the author was not able to determine clearly the trend of SMEs lending activities in Military Bank in the long-term. Another limitation is that this thesis just mentions about SMEs lending activities of Military Bank, not comparing SMEs lending indicators of Military Bank with the other commercial banks in Vietnam and all over the world. Therefore, it is very difficult for researcher in ranking for Military Bank. Another research should deal with these problems.
Research Structure Executive summary Introduction Chapter 1: Lending activities for SMEs in commercial banks Chapter 2: SMEs lending activities in Military Bank Chapter 3: Solutions and recommendations to improve SMEs lending activities in Military Bank Conclusion 4 CHAPTER 1: LENDING ACTIVITIES FOR SMES IN COMMERCIAL BANKS 1.1 Overview of SMEs 1.1 Definition of SMEs SMEs (also small and medium businesses, SMBs, and variations thereof) are companies whose headcount or turnover falls below certain limits. The abbreviation SMEs occurs commonly in the European Union and in international organizations, such as the World Bank, the United Nations and the WTO. The term small and medium-sized businesses or SMBs are used predominantly in the USA. EU Member States traditionally have their own definition of what constitutes an SME, for example the traditional definition in Germany had a limit of 250 employees, while, for example, in Belgium it could have been 100.
But now the EU has started to standardize the concept. Its current definition categorizes companies with fewer than 10 employees as "micro", those with fewer than 50 employees as "small", and those with fewer than 250 as 1 "medium". By contrast, in the United States, when small business is defined by the number of employees, it often refers to those with fewer than 100 employees, while medium-sized business often refers to those with fewer than 500 employees. Both the US and the EU generally use the same threshold of fewer than 10 employees for small offices (SOHO).
In most economies, smaller enterprises are much greater in number. In the EU, SMEs comprise approximately 99% of all firms and employ between them about 65 million people. In many sectors, SMEs are also responsible for driving innovation and competition. Globally SMEs account for 99% of business numbers and 40% to 50% of 2 GDP.
1 th Recommendation 2003/361/EC was adopted by European Commission on 6 May 2003 and effected from st 1 January 2005 2 Dr. Schaefer – “How Small and Medium-Sized Enterprises Acquire Competitive Technology” 5 In India, the Micro and Small Enterprises (MSEs) sector plays a pivotal role in the overall industrial economy of the country. It is estimated that in terms of value, the sector accounts for about 39% of the manufacturing output and around 33% of the total export of the country. Further, in recent years the MSE sector has consistently registered higher growth rate compared to the overall industrial sector.
The major advantage of the sector is its employment potential at low capital cost. As per available statistics, this sector employs an estimated 31 million persons spread over 12.8 million enterprises and the labour intensity 3 in the MSE sector is estimated to be almost 4 times higher than the large enterprises. In South Africa, the term SMME, for Small, Medium and Micro Enterprises, is used. Elsewhere in Africa, MSME is used, for Micro, Small and Medium Enterprises.
Size thresholds vary from country to country. In Viet Nam, according to 90/2001/ Degrees – Government on 23/11/2001, SMEs are defined as companies which have independent producing enterprise, have registered suitably to current law, have registered capital which does not exceed VND 10 billion or have annual average labour which is not over 300 units. In recent years, Vietnamese SMEs have also occupied bigger proportion in overall Vietnamese enterprises so developing SMEs is a very important task in the industrializing and modernizing period of Vietnam. Vietnamese government has paid attention to this type of entrepreneur and issued proper policies.