i UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS • VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS BANK CREDIT APPRAISAL CRITERIA FOR BORROWING FIRMS IN VIETNAM A thesis submitted in partial fulfilment of the requirements. for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS t By LE DiNH THUY NGAN Academic Supervisor: Asso.TRUONG QUANG THONG HO CHI MINH CITY, DECEMBER 2010 - -~ UAN VAN CHAT LUONG download : add luanvanchat@agmail.com CERTIFICATION i • I hereby certify that the substance of this thesis has not been submitted for any degrees and is not being currently submitted for any other degrees. I also certify that, to the best of my knowledge, and any help received in preparing the thesis and all sources used have been acknowledged in the thesis. Signature ' LeDinh Thuy Ngan Date: December, 2010 •.
· ~ _- UAN VAN CHAT LUONG download : add luanvanchat@agmail.co ACKNOWLEDGEMENT • This research 1s impossibly completed without the valuable guidance, encouragement and advice from numerous individuals including Vietnam- Netherlands program lecturers, friends and my family members. I am really indebted and grateful to what they have done for my thesis completion. First of all, I would like to send my deepest gratitude to my supervisor, Professor Truang Quang Thong who always gives advice and comments during my completion of the thesis. I am grateful for Professor Nguy~n TrQng Hoai and Professor Peter Calkins for their precious advice and comments from the initial ideas of the theme for my thesis.
• Many especially respectful thanks are sent to my family for encouraging and providing me with an opportunity to pursue my desires in higher learning and for their love, affection and sympathy that have helped me to gain more strength and motive to complete this thesis. UAN VAN CHAT LUONG download : add luanvanchat@agmail.co LIST OFT ABLES Table 2.1: Rating symbols long-term and short-term debt II Table 2.2: Weighted points of non-financial criteria 14 Table 2.3: Weighted points of financial ratios and non-financial criteria 15 Table 2.4: Weighted points of financial ratios and non-financial criteria 15 Table 2.5: Rating symbols ofVCB 16 Table 2.6: Profit and tax with two different capital structure 18 Table 3.1: Sort credit rating business 25 Table 3.2: Business structure has ability to repay 26 Table 4.1: Following explain the meaning of variables (see appendix 1) 31 Table 4.2: Points of cash flow factor 37 Table 4.3: Points of management quality factor 38 Table 4.4: Points of relations with banks factor (see appendix 3) 39 Table 4.5: Points of business environment factor 40 Table 4.6: Points of other activities factor 41 Table 5.1: Descriptive Statistics 44 Table 5.3: Model summary (see appendix 5) 46 Table 5.5: Coefficients of models (see appendix 6) 46 Table 5.6: Distribution graph 48 Table 5.7: Spearman rank correlation 48 Table 5.8: Standardized residual graph 49. UAN VAN CHAT LUONG download : add luanvanchat@agmail.co ABBREVIATIONS BIDV: Bank for Investment and Development of Vietnam CIC: Credit information center EBIT: Earning before tax and interest rate EU: Europe FDI: Foreign Direct Investment GDP: Gross Domestic Products GSO: General Statistics Office ofVietnam MM: Modiglian Miller SBV: State Bank of Vietnam SMEs: Small Medium Enterprises U.: United States VCB (Vietcombank): Bank for Foreign Trade of Vietnam WACC: Weighted average cost of capital. UAN VAN CHAT LUONG download : add luanvanchat@agmail.co ABSTRACT Capital credit is very important in business activities of enterprises.
The ability to repay loans model in this thesis shows an important role when the bank make a lending decision. This study examines and analyses credit rating criteria affecting borrowing firms on bank credit appraisal in Vietnam through applying cross-section data from Credit Information Center which concentrate on forty firms including the medium-sized enterprises that has equity capital more than five billions Vietnam dong or number labor more than two hundred people in leather-footwear industry. The regression model is estimated based on the multiple linear regression function. The ability to repay loans is dependent variable in the thesis model, and independent variables are current ratio, quick ratio, inventory turnover, receivable turnover, total asset turnover, debt to equity ratio, debt to total asset ratio, return on asset, return on common equity ratio, net profit margin ratio, delinquency ratio, cash flow, management quality, the relations with banks, business environment, other activities and corporate income tax (new added).
As results, corporate income tax factor affecting Vietnam. Moreover, the results seem to be appropriate to answer questions of the research, borrowing firms are perceived to be information on the lending decision at banks in UAN VAN CHAT LUONG download : add luanvanchat@agmail.co TABLE OF CONTENTS LIST OF TABLES ABBREVIATIONS ABSTRACT CHAPTER 1: INTRODUCTION 1 1. The structure ofthesis 6 CHAPTER 2: LITERATURE REVIEW 7 2. The definition of credit rating 8 2.
Objective of credit rating 8 2. Role of credit rating 8 2. Principle credit rating 8 2. Credit rating model 9 2.
The basic elements of credit rating 9 2. The number ranks of credit rating 9 2. Scale of criteria 10 2. Some model of credit rating 10 2.
Moody's rating analysis 10 2. Z-score model of Altman 12 2. Credit rating of credit information center 13 2. Credit rating VCB 13 2.
Corporate income tax 17 2.1 Assumptions and proposition ofM&M theory 17 2.2 MM proposition I (corporate taxes)- The value of levered firm 17 2.3 Optimal capital structure theory 20 UAN VAN CHAT LUONG download : add luanvanchat@agmail. Summary 21 CHAPTER 3: OVERVIEW OF LEATHER - FOOTWEAR INDUSTRY IN VIETNAM 23 3. Reasons of using data in Vietnam's leather - footwear industry 23 3. Overview ofleather- footwear industry in Vietnam 23 3.
Credit ratings data ofthe leather-footwear industry in year 2008 24 3. Summary 27 CHAPTER 4: METHODOLOGY 28 4. The econometric design 28 4. Suggested research model 29 4.
The conceptual design 32 4. Criteria that banks use to appraise 32 4.1 Current ratio- CR 32 4. Quick ratio- QR 33 ' 4. Inventory turnover- IA 4.
Receivable turnover- RT 34 4. Total asset turnover- TAT 34 4. Debt to total asset ratio - DA 35 4. Debt to equity ratio- DE 35 4.
Net Profit margin- NPM 36 4. Return on assets - ROA 36 4. Return on Equity- ROE 36 4. Cash flow- CF 37 , g1-'l 4.
Management quality- MQ. Relations with banks- RB 39 4. Business environment- BE 39 4. Other activities- OA 41 4.
Delinquency ratio- DR 42 4. Corporate income tax (new factor)- CIT 42 4. Data collection method 43 4. Summary 43 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co CHAPTER 5: DATA PROCESSING AND EMPIRICAL RESULTS 44 5.
Regression and hypothesis testing 45 5. Evaluating the reliability of multiple linear regression model 45 5. Test the relevance of the overall regression model 46 5. Test the significance of partial regression coefficients 46 5.
Assumption of multiple linear regression model 47 5. Distribution standard of residual 49 5. No-serial correlation 49 5. Summary 50 CHAPTER 6: CONCLUSION 51 REFERENCE APPENDIX 1 iv APPENDIX2 v APPENDIX3 V111 APPENDIX4 ix APPENDIX 5 X APPENDIX6 Xl UAN VAN CHAT LUONG download : add luanvanchat@agmail.co CHAPTER 1: INTRODUCTION This chapter starts with introduction to problem statement.
It then presents research objectives, questions and methodology in sections: 1. Finally, this chapter show thesis structure in section 1. Problem statement The world economy is currently undergoing a severe crisis. The cause of the crisis is following: - Objectively, on the theory, growth and development economic generally follows cycle.
After a period of extreme development, it will reach the top, followed by a recession cycle. With this perspective, the world economy developed rapidly in last years of previous century and peaked during the period 2001-2007. - Subjectively, these are the errors in the management economy of economic times "digital" - "virtual economy", particularly in management of financial system, money and banks, namely approximately six percents of all mortgage loans in United States were in default in 2008. Historically, defaults were less than one-third of that, i.
The crisis began with the collapse of Bank Lehman Brother Investment, one ofthe largest banks in the United States, on 9 June 2008 (BBC News, 2008). As year progressed, the United States banking and financial system, followed by the EU and Japan, were all shaken by the crash of multiple banking, corporate finance-insurance institutions. In the first three months of 2009, the situation continued to deteriorate, with GDP growth in most of developed countries dropped to around negative 2. Trade turnover reduced strong (export of Eastern Asia reduced 30%, UAN VAN CHAT LUONG download : add luanvanchat@agmail.co developing countries reduced over 10%) and high rates of unemployment that had never been seen in decades such as unemployment rate of United States is 8.1 percent with over 5 million workers, unemployment rate of Japan is 4.4 percent with nearly 3 million workers, unemployment rate of EU is 7.6 percent I • with nearly 4.
With most developing economies, including Vietnam, to subjective effort, growth and development depends on two fields: export-import and capital resource. Growth indicators, FDI, turnover export during the end of the year 2008 to the present, all indicated that the crisis is affected by the economic- financial global on the economy of Vietnam: GDP in 2008 adjusted to 6% (2009 adjusted also decline 6-6.5% to 5-6%, while EU predicted about GDP increased only 0.3%); FDI in the first two months of 2009 with only 5 billion USD (by 31% in the same year 2008); unemployment increased (Ministry of Foreign Affairs Vietnam, 2009). In the banking sector, under the guidance of the Government and the Prime Minister, to stabling economic growth, the orientation of credit growth m Vietnam must maintain credit growth and ensure credit quality. Hence, to achieve credit growth in years after 2008, namely banks need to search new added corporate income tax factor in credit appraisal to increase loans but ensuring repayment ability of borrowers.
It is the motivation for present thesis on credit appraisal criteria for borrowing firms in Vietnam banking. The main objective ofthis thesis is to determine new factor (corporate income tax factor) affect the ability to repay loans of borrowers in Vietnam. Factors which banks are used in credit appraisal are: current ratio, quick ratio, inventory turnover, receivable turnover, total asset turnover, debt to equity ratio, debt to total asset, return on asset, return on common equity, net profit margin, delinquency ratio, cash flow, quality management, relations with banks, business 2 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co environment, other activities, and factor is proposed to apply in credit appraisal ofVietnam banking now is corporate income tax factor. The regression model is used to estimate ability to repay loans of the borrowers.
Then, banks decide to rely on repayment ability. In this model of thesis, dependent variable is ability to repay loans of the firms for the banks to lending decisions. Research objective The objective of this thesis is to analyze corporate income tax factor which is proposed to add in 16 factors are used in credit appraisal in order to determine debt repayment ability of borrowers. Beside many criteria are used in banks such as current ratio, quick ratio, inventory turnover, receivable turnover, total asset turnover, debt to equity ratio, debt to total asset ratio, return on asset ratio, return on common equity ratio, net profit margin ratio, delinquency ratio, cash flow, management quality, the relations with banks, business environment and other activities, this thesis find out about level influence of corporate income tax factor in credit appraisal.
Because corporate income tax is an expense, on one hand, enterprises tend to find ways to set the tax shields such as increased use of debt instead of equity, on the other hand, minimizing corporate income tax and some savings will contribute to increasing business value.