Contribution of banking credit to new rural construction in south central provinces

Having diserve forms of loans, customers can choose the lending method suitable for

their types production and business; based on that they can have specific poduction plans

and repayment plans. Diversification also requires a combination of flexible lending

methods such as inter-bank loans, limit loans, etc. to help borrowers become more proactive

in using capital in line with the production cycles and products in agriculture.

- In case the customer does not meet the loan conditions to access credit capital, the

banks implement a linkage model of three, four, or five partners in production and provides

support in the form of in-kind credit products to overcome this limitations.

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1. Research objects The thesis focuses on theoretical and practical issues on contribution of bank credit activities to new rural construction in South Central provinces. 4.2. Research scope - In terms of content: The author limits the scope of the study to contribution of bank credit activities to new rural construction in South Central provinces. - In terms of space: Data for analysis are collected from the branches of BIDV and VBSP in South Central provinces; these are two credit institutions that mainly implement credit policies used for agriculture, rural development and new rural construction. 7 - About time: + The thesis studies and assess reality of credit activities for new rural construction in South Central provinces during 2014 - 2019. + The thesis proposes solutions to improve contribution of bank credit activities to new rural construction in South Central provinces and recommendations to relevant agencies until 2025. 5. Research methodologies Data sources used for the research were collected as secondary data on new rural construction from 2010 to 2019 from the Coordination Office on New Rural Development of provinces in the South Central region, the official websites of the Departments of Agriculture and Development of South Central provinces, reports summarizing 5 years and 10 years of new rural construction of South Central provinces and other regions of the country from the Central Coordination Office on New Rural Development under the Ministry Agriculture and Rural Development (MARD), the General Statistics Office Of Vietnam. The bank credit data were collected from the income statements of the VBSP in South Central provinces, Agribank Central Office in the period 2014 - 2019, branches of the State Bank of Vietnam in South Central provinces. From the collected data, on the basis of dialectical materialism and historical materialism methods, the following methods are used during the thesis implementation process: - Methods of analysis - synthesis: this method is used used throughout the thesis to systematize, synthesize theory to form the theoretical framework for research issues. - Descriptive statistical method: this method is used to collect information and data; summarize, present, calculate and describe different characteristics to generally reflect the research object. - Comparison method: this method is used as the basis for analysis and identification of trends and fluctuations of criteria. The statistics are from secondary data sources and systemized according to time series, to plan and are used as the basis for comparison and evaluation. - Method of expert opinion: Researches carried out in this thesis were consulted by officials at department, office or industry level who are directly related to directing and coordinating the National Target Program of Building New Rural Areas, Ministry of Agriculture and Rural Development (MARD), Coordination Office on New Rural Development under the MARD, and credit officers of Agribank and VBSP. - Methods of scientific inheritance: The author presents an overview of scientific studies related to the thesis topic; these results help the author complete the theoretical basis and the solutions of the thesis. 8 6. New contributions of the thesis Firstly, the thesis has systematized the theoretical framework on new rural construction and bank credit for new rural construction. Secondly, the thesis has summarized studies on bank credit for agricultural and rural development, new rural construction in some countries in the world such as China, Korea, India and the experience of two provinces of Nam Dinh and Binh Duong, thereby, thereby drawing experience lessons for the South Central provinces. Thirdly, by research methods, the thesis has assessed the reality of new rural construction in the South Central provinces in the 2014 - 2019 period. Fourthly, the thesis proposes a number of solutions for banks in general, especially Agribank and VBSP, to promote contribution of bank credit to new rural construction in South Central provinces 7. Structure of the thesis In addition to the preface, conclusion, list of reference materials and appendices, the thesis consists of 3 chapters Chapter 1: Theoretical basis of bank credit for new rural construction Chapter 2: The reality of of bank credit for new rural construction in South Central provinces Chapter 3: Solutions to bank credit contribution to construction of new rural areas in South Central provinces 9 CHAPTER 1: THEORETICAL BASIS OF BANK CREDIT FOR NEW RURAL CONSTRUCTION 1.1. Overview of rural construction 1.1.1. Concept of new rural area New rural area is a rural area in which the material, cultural and spiritual lives of the people is constantly improved, gradually reducing the gap between rural and urban areas. Farmers are trained to adopt advanced technologies, have a strong political stance, and play a leading role in new rural development. 1.1.2. Concept of new rural construction Thus, the concept of "new rural construction" “is understood as the development process from outdated rural areas to rural areas with modern production industry, high quality and productivity, and, at the same time, the process helps improve people's lives (To Ngoc Hung, 2016). 1.1.3. Content of new rural construction New rural construction towards implementation of the Set of National Standards in Decision No. 1600/QD-TTg dated Aug 2016 of the Prime Minister on approving national target programme and Decision No.1980/QD-TTg dated Oct 17, 2016 on on promulgation of national criteria for New Rural area in 2016 - 2020. 19 criteria are promulgated in detail in the program with contents of (1) New rural construction planning; (2)Socio-economic infrastructure (3) Economy and organization of production, (4) Culture-society and environment, (5) Political system. 1.2.Bank credit for new rural construction 1.2.1. Concept and characteristics of bank credit Concept of bank credit Based on theories about bank credit for new rural construction presented in previous studies and the author’s study, th author genelizes the concept of bank credit for new rural construction as follows: Bank credit for new rural construction is understood as credit activities of commercial banks to entities in rural areas, participating in agricultural production activities with the main of providing capital for farmers to serve production and economic development, thus contributing to hunger eradication and poverty reduction, increase in income and completion of new rural construction criteria. Characteristics of bank credit  Appropriate loan management procedures and processes  Lending period and debt collection plan are associated with agricultural production and business activities 10  The natural environment and prices affect farmers’ income and ability to repay.  High loan costs and great risks  The loan security assets are mainly low-value land use rights or unsecured loans 1.2.2. Bank credit classification - According to credit terms - According to customer’s credibility - According to the purpose of borrowing - According to lending method 1.2.3. Role of bank credit for new rural construction - Bank credit is an important financial resource in the new rural construction process - Bank credit is a tool to finance infrastructure development in rural areas, creating conditions for each business to adopt new technologies into production and business. - Bank credit gives people a continuous improvement in education, production, and economic accounting. 1.2.4. Criteria to evaluate bank credit activities for new rural construction - Growth in service provision scale and new rural loan income - Expanding of market share for new rural loans - Diversity of new rural loan services - The perfection of service quality - Risk control in lending for new rural construction - Criteria from the customer side. 1.3. Influencing factors of bank credit for new rural construction 1.3.1. Factors from supporting agencies and organizations 1.3.2. Factors from bank 1.3.3. Factors from customers 1.4. Experience for bank credit for new rural construction in some foreign countries, in some typical localties in Vietnam and lessons for South Central provinces 1.4.1. Experience of Chinese China is considered a large developing agricultural country with more than 720 million people and more than 121 million ha of farmland with a vastly untapped rural financial market. The Central Bank of China estimates that about two-thirds of the total farmers lack banking services, although the credit and loans in the China Rural Credit Fund each year increase by 20%, higher than the national average. To address chronic fiscal shortages in rural areas, the Government has asked financial institutions such as the Agricultural Bank of China (ABC), Agricultural Development Bank of China (ADBC), Rural Credit Cooperative (RCC), Rural Postal Saving (RPS) and china banks to increase credit loans related to agriculture. In particular, the ADBC is instructed to expand the field 11 of agricultural support and increase long-term credit for rural infrastructure construction. In addition, state-owned commercial banks, such as the Investment and Commercial Bank and life and property insurance companies in Xinyang and Shanghai, also provide some financial services to farmers. 1.4.2. Exeperience of Korea Saemaul Undong" means the community renewal movement, launched by the President of Korea on April 22, 1970. With drastic policy changes, Korean agriculture has grown from being small and fragmented with backward production to becoming a modern, industrialized industry. This process started with agricultural cooperatives and quickly spread throughout rural areas of Korea. Besides agricultural cooperatives, the Korean government also focused on developing micro credit institutions, bringing credit closer to farmers. Micro-credit in Korea is mainly conducted by non-governmental organizations; the government only plays a leading role in policy making and solutions. 1.4.3. Experience of India India is also a country with the majority of the population living on agriculture (52%); therefore, up to now, agriculture is still considered the backbone of the Indian economy. In order to implement these policies, a secured rural credit institution system is needed. Currently, rural credit in India is divided into two types: institutional and non-institutional. Non-institutional sources of credit include money lenders, traders, brokers, friends and relatives. Commercialization in agriculture has made traders and brokers become big money lenders in the rural economy with fertilizers and pesticides provided by traders through credit or deferred payment. Institutional credit is provided by co-operative banks with the amount of credit available for agriculture tripled between 2005 and 2013, accounting for about 20% of total credit supply for agriculture in the country. Reserve Bank of India (RBI) and commercial banks act as the largest institutional funding source for the agricultural sector in India, accounting for over 65% of total credit flow into the region during the 2005 - 2013. 1.4.4. Experience of Nam Dinh province Nam Dinh is one of the first two provinces in the country to complete the task of new rural construction. After 9 years, by the end of July 2019, Nam Dinh province has 100% of communes and towns, 10/10 districts and cities meeting new rural standards, one year earlier than the target set in the Resolution of the XIX Provincial Party Committee. This is thanks to efforts from many parties including the significant contribution of the banking system. As of early October 2019, outstanding loans for new rural construction in 209 communes of the province reached VND 31,984 billion; non performing loan ratio accounted for only 0.4% of the total outstanding loans to new rural commune. The number of outstanding customers was 210,440 (households: 209,568; enterprise 860; cooperative 12 12). The average outstanding loan of each new rural commune by October was 153 billion VND/commune, an increase of 103 billion VND / commune compared to 2011. From the VBSP loans, in the past 10 years, 67,504 poor households, 45,118 near-poor households, 14,432 households have just escaped from poverty and 221,052 other policy beneficiaries have had access to loans; this helped 30,106 households escape poverty, 8,662 households escape near poverty and disburse loans to 52,119 students to continue their studies. 1.4.5. Experience of Binh Duong province By 2019, Binh Duong is among 8 provinces and cities nationwide that have 100% of new rural communes. At present, there are 46/46 communes meeting new rural standards, 1 commune meet advanced new rural standards; communes are continuing to invest in improving the quality of criteria according to the set of criteria for advanced new rural communes and model new rual communes; 3/7 units of district and towns meet new rural standards, completing the task of building new rural areas. Thanks to social policy credit activities, financial supports are provided to more than 119,000 poor households and other policy beneficiaries, with a total loan of 3,288 billion VND, contributing positively to helping more than 10,000 households overcome poverty to get rich. More than 5,000 pupils and students have better studying conditions. More than 39,000 laborers maintain jobs and new jobs are created. More than 94,000 clean water projects meeting national standards are built and repaired; capital is disbursed for 103 households to buy or rent social houses. The achieved results have contributed positively to social security, helping 49 communes in the province to meet new rural standards, limiting the situation of usury and black credit in the province. 1.4.6. Experience lessons for South Central provinces From the experience of other countries in the world, especially in China, Korea and India which has many socio-economic similarities, especially the contribution of bank credit in in agricultural and rural development, new rural construction, to Vietnam and the two provinces of Nam Dinh and Binh Duong (which are the leading provinces in new rural construction thanks to the contribution of credit capital), the author draw some lessons for South Central provinces about contribution of bank credit to to new rural construction. Firstly, the provinces of the South Central region need to develop a diverse rural financial market with many participants involved in the supply. Second, it is necessary to diversify investment capital for agriculture and rural areas Third, it is necessary to diversify loan programs / products to farmers Fourthly, preferential interest rates for lending in agriculture and rural areas are required Fifth, the role of policy credit should continued to be promoted. 13 CONCLUSION OF CHAPTER 1 New rural construction requires the mobilization of many resources, of which bank credit plays an important role, providing capital for people in production and business, increasing income, reducing poverty and contributing to economic growth, and implementing social security. Chapter 1 has generalized the basic theoretical issues about contribution of bank credit to new rural construction, such as: concepts, characteristics, roles, loan classification, criteria for evaluating lending activities for new rural construction. Chapter 1 has analyzed factors affecting contributions of bank credit for new rural construction and studied experience on bank credit for new rural construction of some countries and typical localities to draw lessons for South Central provinces. 14 CHAPTER 2 : THE REALITY OF BANK CREDIT FOR NEW RURAL CONSTRUCTION IN SOUTH CENTRAL PROVINCES 2.1. Overview of new rural construction of South Central provinces 2.1.1. Socio-economic situation in South Central provinces 2.1.2. Reality of new rural construction in South Central provinces during the period of 2014- 2019 2.2. Reality of contribution of bank credit to new rural construction in South Central provinces during the period of 2014 - 2019 2.2.1. Reality of credit extension in agriculture and rural fields of credit institutions in South Central provinces 2.2.2. Reality of contribution of bank credit to new rural construction in South Central provinces during the period of 2014 – 2019 - Contribution of credit capital to new rural construction in South Central provinces during 2016 – 2019 For South Central provinces, the contribution of credit capital in new rural construction during the period of 2016-2020 is particularly important. As of 2019, the central source for new rural construction is VND 104,093.26 billion, accounting for 65.49% of the total mobilized capital for the implementation of the national target program for new rural construction, higher than the ratio in Decision No. 1600 by the Prime Minister. This source of credit capital acts as the leverage and motivation for people in the region to boldly invest in economic development, rising out of poverty, contributing to raising incomes, creating a new face for rural areas. Table 2.10: Contribution of credit capital to new rural construction in South Central provinces during the period of 2016 – 2019 Unit: billion dong, % South Central provinces Credit capital for new rural construction Total capital for new rural consruction % of credit/total capital for new rural construction Da Nang 868,21 3.691,57 23,52 Quang Nam 14.357,51 28.130,36 51,04 Quang Ngai 3.080,45 9.320,46 33,05 Binh Dinh 44.329,89 53.137,67 83,42 Phu Yen 8.506,22 17.577,83 48,39 Khanh Hoa 9.803 12.772,74 76,75 Ninh Thuan 1.022,19 2.944,43 34,72 Binh Thuan 22.125,79 31.350,87 70,57 Total 104.093,26 158.925,93 65,49 Source: : Summary report on 10 years of new rural construction of South Central provinces 15 - Size of bank credit for new rural construction To analyze the contribution of credit activities to new rural construction in South Central provinces, the author only uses data of Agribank and VBSP because as of 2019, the credit scale these two banks is 92,541 billion dongs, accounting for nearly 90% of the outstanding loans for rural construction in South Central provinces. More than 10% of the remaining debt is dispersed in various credit institutions such as Lien Viet Bank, BIDV, micro-finance institutions, people's credit funds, etc., Source: Income statements of the representative office of Agribank in the Central region and of VBSP branches in Central provinces, plus the author’s calculation The scale of outstanding loans at VBSP and Agribank increases continuously over the years, from VND 48,077 billion in 2014 to VND 92,541 billion in 2019, an approximate increase of 2 times. The scale increased steadily in both banks, of which Agribank had a faster increase rate than VBSP. In parallel with the credit balance, the number of customers granted credit in South Central provinces also increased from 1,007,000 customers in 2014 to 1,441 thousand customers in 2019. After the implementation of Decree 55/2015 / ND- CP and ND 116 / ND - CP on credit policies for agricultural and rural development applied to VBSP and credit policies for households newly escaping poverty of VBSP, the growth rate of the number of customers granted credit in the field of agriculture, rural areas and new rural construction continuously increased over the years from 6.82% in 2016 to 7.89% in 2019). Increasing access of people in the rural area to credit capital from commercial banks has helped people to have capital to organize. production, improving material, cultural and spiritual life, contributing to the completion of new rural construction criteria of localities in the region. 16 Table 2.11: The number of customers granted credit of Agribank and VBSP in South Central provinces, during the period of 2014 – 2019 Unit: thousand of people, % Target of number of customers with outstanding loan 2014 2015 2016 2017 2018 2019 VBSP 669 721 787 864 977 1.104 Agribank 339 355 367 375 359 337 Total customers approached 1.007 1.076 1.155 1.240 1.336 1.441 Growth in number of customers granted credit 6,82 7,29 7,36 7,74 7,89 Source: Income statements of the representative office of Agribank in the Central region and of VBSP branches in Central provinces, plus the author’s calculation -. Structure of bank credit fornew rural construction a/ Credit structure according to lending purpose Data in table 2.13 show that credit for new rural construction during the period of 2014 - 2019 mainly focused on production and business loans in rural areas and for consumption, accounting for over 95%, in which credit for agricultural production accounted for over 60% - twice as much as consumer credit. Moreover, the outstanding credit balance for production and business grew continuously from VND 33,555 billion in 2014 (accounting for 69.8%) to VND 97,964 billion in 2019 (accounting for 73.4%). In addition, outstanding loan to rural households also increased from VND 12,860 billion in 2014 to VND 21,604 billion in 2019. However, the increase in outstanding loans for consumption was slower than for production and business; the loan proportion tended to decrease slightly in this period. This shows that subjects in rural areas paid more attention to using loans for agricultural production and business activities, creating more positive effect in other activities as well to create income and improve faces of life. Table 2.13: Credit structure according to borrowing purpose in the VBSP and Agribank in South Central provinces during the period of 2014 – 2019 Unit: billion, % Borrowing purpose 2014 2015 2016 2017 2018 2019 O/S % O/S % O/S % O/S % O/S % O/S % Business, production 33.555 69,8 37.300 71,0 43.021 72,0 53.360 73,2 61.971 73,8 67.964 73,4 Consumption 12.860 26,7 13.516 25,7 14.735 24,7 17.530 24,0 19.600 23,3 21.604 23,3 Other 1.662 3,5 1697 3,2 1.969 3,3 2.024 2,8 2.451 2,9 2.973 3,2 Total 48.077 100 52.513 100 59.725 100 72.914 100 84.022 100 92.541 100 Source: Income statements of the representative office of Agribank in the Central region and of VBSP branches in Central provinces, plus the author’s calculation (O/S= outsanding) 17 - For VPSB, the proportion of business loans to consumption fluctuated around 2 times, similar to the trend of the general statistics results of both banks. In the consumer lending structure of VBSP, the author only introduces two lending activities for disadvantaged students and loans for clean water & sanitation because these two loans account for a large proportion in total outstanding loans of the bank and other loans accounted for a small proportion which the author puts in other lending purposes. - For Agribank, lending for agricultural production and business accounts for a high proportion compared to consumer loans and loan for other purposes. The proportion of business loans is more than 3 times compared to consumer loans and loan for other activities, accounting for over 70% of the bank's total outstanding loans. Outstanding loans for production and business grew over the years from 2014 to 2019 and reached over VND 50 trillion in 2019, accounting for 75.2%. b/ Credit structure according to borrower Outstanding loans to individuals and households continuously increased over the years from 2014 to 2019. By 2019, the outstanding loans to these borrowers of both banks were 57,329 billion VND, increased by 1.67 times compared to 2014, accounting for 61.95% of the total outstanding credit for agriculture and rural areas. Outstanding loans for these borrowers increased steadily over the years from 2014 to 2019. By 2019, outstanding loans reached VND 32,593 billion, accounting for 35.22%, an increase of VND 3,479 billion compared to 2018, nearly 3 times higher than outstanding loans in 2014 (VND 10,957 billion). Table 2.16: Credit structure according to borrower of Agribank and VBSP in South Central provinces during the period of 2014 – 2019 Unit: billion VND, % Borrower 2014 2015 2016 2017 2018 2019 O/S % O/S % O/S % O/S % O/S % O/S % Individual, household 34.442 71,64 35.625 67,84 39.156 65,56 46.650 63,98 52.203 62,13 57.329 61,95 SMEs 10.957 22,79 13.580 25,86 2

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