Đề tài Guarantee Operations at Agribank – Current Situation and Recommendations

, and mortgage. However, the guarantee deposit plus mortgage assets must be more valuable than guarantee money. 2.2.7. Orders and procedures of issuing guarantee at Agribank According to the latest decision number 398/QD-HDQT-TD on May 2nd 2007, the guarantee issue process must have the participation of three grades: credit staffs, head of credit department and the manager of Agribank’s branches. a. Credit staffs Instruct the regulations of guarantee operation at agribank to the customers. Collect information of customers as well as the duty of guarantee. Assess the guarantee conditions. Make an assessment report showing specific ideas about accept or refuse to issue guarantee. Be responsible for this assessment then send this report to the credit department (or business planning department.) After receiving the manager or director-general’s decisions: + draw up a document to inform the customer of the bank’s decision (accept guarantee or not), then present to the manager for signing and send to the customer at last. + draw up guarantee letter (or indirect guarantee later in case Agribank plays as a correspondent bank), or guarantee contract and a contract of guarantee security, then present for signing. + give one guarantee engagement to the guarantor and the other to the customer according to agreement in the contract. Give a guarantee file (including above referred documents) to the secretary after the guarantee engagement has been signed. Keep the guarantee file according to Agribank’s current regulations and open a guarantee ledger control account. Supervise and speed up the duty implementation of the customer according to the related guarantee contract. Propose appropriate measures to deal with problems if happened. Follow through the credit manager and manager-general’ measures. b. Head of credit department (or business department) Check all the guarantee proposal file and assessment report of the credit staffs; write the idea clearly on the assessment report (for or against guarantee issue). Assess directly if necessary. Examine the content of draft guarantee letter, guarantee contract, guarantee issue contract and the contract of guarantee security, whether they fit current guarantee regulations of Agribank or not. Present to the manager-general for signing (if acceptable) or ask the credit staffs for changes and supplements to complete the documents. Supervise and speed up the duty implementation of the customer together with credit staffs, propose measures if needed. Be responsible for every tasks and content implemented. c. Manager-general of Agribank’s branch Examine the draft guarantee file made by credit staffs and credit manager (or business manager) and decide whether to issue guarantee or not. Sign the guarantee letter, guarantee contract, contract of guarantee security if agree. In case the Agribank branch manager can not decide because it exceeds his authority, he should draw up a statement and transfer all related documents (the signed and sealed copy ones.) Direct the staffs to implement approved guarantee. Follow through instructions and requirements of Agribank manager-general about the signed guarantee. Supervise and speed up the customers’ implements together with the credit manager and staffs. Be responsible for all decisions. 2.3. CURRENT SITUATION OF GUARANTEE OPERATIONS AT AGRIBANK Operation Centre is a unit directly under Agribank. Inheriting and promoting the Agribank’s strength, it can implement a new service of modern bank so as to satisfy the economy’s demand and the bank service’s product diversification demand. Guarantee operations not only bring profit but also increases prestige and boosts other business activities Agribank. Agribank has lately promulgated “Bank Guarantee regulations in Agribank system” (according to the decision number 398/QD-HDQT-TD on 2nd May, 2007.) This promulgation actually paves the way for performing guarantee duty, simplifying the guarantee procedure, contributing to the bank’s income. Despite these noticeable achievements, guarantee operations have not become a flexible instrument. Operation Centre has not fully capitalized on itself potentiality or satisfied the guarantee demand of customers. To give an overall picture of current situation of guarantee operation at Agribank, figures of three latest years 2005, 2006, 2007 and some evaluation will be shown. Current situation of concerned matter is reflected through both qualitative indicators and quantitative indicators. 2.3.1. Qualitative indicators Qualitative indicators refer to Agribank ability to satisfy customers’ demand and attract customers. Because bank customers come from diversified industries, their demands of guarantee are different in type, rate and so on. The bank should pay special attention to satisfy all customers. Capacity of satisfying and attracting customers is manifested in reasonable fee, low operation cost, safety rate, convenient procedures, various guarantee type. In fact, Agribank has partially recognized this. Customers doing transaction at Agribank are instructed enthusiastically by friendly staffs. Procedures of guarantee offer, so, are implemented quickly and smoothly. Furthermore, competitive cost is another selling point. Besides, qualitative indicators also consist of the bank’s prestige. If a bank is successful in building up reputation to customers it lays the ground for not only maintaining loyal customers but also attracting more new ones. Thank to increasing prestige, the number of customers doing transaction with Agribank including guarantee grows considerably. Therefore, guarantee debit balance, revenue and profit from the operations rise significantly. Quantitative indicators will prove this growth. 2.3.2. Quantitative indicators a. Guarantee debit balance in the years Guarantee debit balance reflects the number of guarantee arising through years. It is of key important to evaluate the guarantee development. If guarantee debit balance is high through years it means guarantee has increased in quantity. However, it does not mean that the bigger this figure is the better guarantee situation of the bank is. If the guarantee debit balance in a year is extremely high but almost of these guarantee are risky the bank is highly likely to pay the debt for customers. In this case, guarantee operations at the bank can not be considered developed. Only when the guarantee debit balance increases regularly with valuable and safe guarantee does guarantee activity grow. Guarantee is new operations in Vietnam commercial banks not apart from Agribank. It, thus, accounts for just a tiny fraction of the bank transaction. Nevertheless, this operation grows more and more through years. The following table shows its development to some extent. Table 1 Unit: million VND Year Targets 2005 2006 2007 Guarantee balance 27,170 67,952 94,473 Balance +40,782 +26,521 (Source: Guarantee activities report of Credit Department, Operation Centre) The table shows that the Guarantee balance grows rapidly and the following year’s increases more considerably than the year before. This is the good signal for the bank indeed. In 2005, guarantee balance is just a small proportion of VND 27,170 million. The 2006’s rises sharply and surprisingly because Agribank entered into a major guarantee contract with Vinashin worth USD 2,998,957.5. This number more than doubles the year before with the positive number of VND 40,782 million. It is one of the typical examples of the attraction of guarantee activity at Agribank. The increase of guarantee debit balance is shown more clearly in the following chart: Chart 1: Guarantee Debit Balance through Years In 2007, the balance continues being positive with the increase in guarantee balance of VND 26,521 million. A very great guarantee contract has been signed, which results in growth number of guarantee balance in this year. It is the guarantee contract between Agribank and Vietnam Machinery Installation Corporation. The guarantee balance amounts to VND 48,097,381 million. It is an unprecedented giant of guarantee at Agribank. Objective reasons of this rise include the comprehensive government import-export policy and WTO full member position of Vietnam. It can not be denied that joining WTO has paved the way for Vietnam economy development especially investment activity and banking system. There are a lot of foreign investors in Vietnam and guarantee activity of the bank, thank to this, is expanded. Moreover, the sound leadership of the bank manager board still contributes to this growth. b. Guarantee turnover: When the bank follows through the guarantee commitment, a customer has to pay guarantee cost at a given rate out of the total guarantee surplus. And the bank must not pay any other service cost. Guarantee turnover reflects profitability of guarantee operations. From this figure guarantee revenue out of the total revenue of all bank services is inferred and this is the reason why guarantee turnover reveals the position of guarantee operations in the bank system. Here is the turnover of guarantee activities in 3 year: 2005, 2006 and 2007. Table 2 Unit: Million VND Year Targets 2005 200 6 2007 Amount % Amount % Amount % Guarantee Operation Turnover 644 4,11 371 1,82 758 2,44 Total Services Turnover 15,673 100 20,532 100 30,945 100 (Source: Guarantee Activities report of the Credit Department) From this table we can see the turnover of guarantee operations at Agribank increases/decreases irregularly in the 3 years. The contribution of the guarantee operation turnover to the total bank turnover only occupies a small share. In 2005, the guarantee turnover of Agribank is quite high (VND 644 million) and makes up 4, 11% of all services turnover. However, in 2006 the guarantee turnover decreases steadily (VND 273 million) while total services turnover of Agribank increases at VND 20,532 million, greater than 2007’s VND 4859 million. This leads to rapid decline (2, 29%) in guarantee turnover rate out of the total. It seems to be contradictory with the Table 1 because the guarantee balance in 2006 even more than doubles the number in 2005. In fact, the reason is not so complicated. The guarantee balance in 2006 is bigger than in 2005 because Agribank signed more valuable guarantee contracts, but their due date are in 2008 and the bank has not collect these fees. Consequently, the guarantee revenue in 2006 is negligible against the total one. The situation is getting more optimistic in 2007. The guarantee turnover nearly doubles the year before; this is not to mention a huge guarantee contract with Vietnam Machinery Installation Corporation (VND 48 trillion) with the due date till 2009. Together with guarantee turnover, the bank total services turnover rises significantly (>VND 10 trillion the year before.) The guarantee turnover rate, thus, only grows 0, 62% against 2006 and is still 1, 67% lower than 2005. In summary, guarantee turnover at Agribank through 3 latest years only occupies a tiny share compared with the other services’ because guarantee operations are less well-known than other traditional services like credit and payment. The market demand for this service still remains limited. Its importance has not been attached so the fluctuation of guarantee improvement is indispensable. The guarantee turnover fluctuation through years is shed brighter light into in the chart below. Chart 2: Guarantee turnover against total c. The assurance forms for guarantee Bank guarantee is a credit form, thus, it also runs the risk. To avoid risk, Agribank conducts to establish guarantee fund, according to regulation, at the minimum rate 5% of the guarantee amount of money. The bank has to keep a remarkable frozen capital which should have been used. However, guarantee fund is necessary because it is an assurance form for the bank. The guarantee forms are: 100% deposit or less than 100% deposit and giving property as security (properties here are saving certificates, real-estate paper) Except some special cases (prestigious or traditional customers), almost customers doing the transaction at Agribank must deposit 100%. It is not flexible and convenient for customers. Most enterprises need capital turnover so customers just accept to deposit 100% for a small guarantee value or when the beneficiary requires. With regard to valuable guarantee contract, customers can not borrow for 100% deposit. d. Guarantee structure * Guarantee structure of domestic guarantee Agribank guarantee operations provide more than 10 types of guarantee (referred at the beginning of this chapter) but actually at Agribank operation center there are three key guarantee types: bid bond, performance and payment. The rate of each type is changing through 3 latest years 2006, 2007 and 2008. Table 3 Unit: VND million Indicator 2005 2006 2007 Amount % Amount % Amount % Total Guarantee Balance(GB) 27,170 100 67,952 100 94,473 100 Bid bond B 4,899 18.03 4,748 6.99 4,996 5.28 Performance bond B 5,396 19.86 6,546 9.63 62,299 65.94 Payment GB 12,566 46.25 53,864 79.27 1,315 1.39 Others GB 4,309 15.86 2,794 4.11 25,863 27.39 (Source: Guarantee Activities report of the Credit Department) From the above table, bid bond is the most stable guarantee type. Guarantee balance of this type remains approximately VND 5 trillion in all three year 2005, 2006 and 2007. However, the percentage of bid bond does not stay the same. It accounts for 18.03% in 2005 but decreases at 4.748% and 5.28% in turn in 2006 and 2007. It means that Agribank is trying to expand into different guarantee types beside bid bond. Despite occupying a small rate in total guarantee balance, its stability shows that Agribank has carried out this guarantee relatively well. With bid bond, Agribank enables its customers to take part in the tenders and seize business opportunities. Especially, when the customers become contract winners, beside bid bond fee the bank still has another opportunity to sign the next contracts of performance bond and warranty. Two kinds left are not stable. In 2005 and 2006 performance bond balance rises lightly from VND 5,396 million to VND 6,546 million. This type, however, boosts surprisingly at VND 62,299 million and makes up 65.94% of total guarantee balance in 2007. The main reason is the value of performance bond is greater than bid bond 10-15% of contract value. In addition, the performance bond contract with Vietnam Machinery Installation Corporation worth VND 48 trillion which occupies 77% of all performance bond balance. Together with bid bond, performance bond and warranty guarantee create a closed cycle which the customers often require. This is the reason why these guarantee types keep developing in the future and the bank should pay more attention on these. Payment guarantee is the backbone of guarantee operations. In 2005 and 2006 it accounts for 46.25% and 79.27% of the total guarantee balance in turn. In contrast, it decreases incredibly to VND 1.3 trillion and only occupies 1.39% of all guarantee balance. In fact, it does not mean this guarantee type is less developed. The number of this guarantee contract is not abundant but the value of each contract is very high. However, in 2007 payment guarantee contracts are mostly signed with foreign company and this table only contains inland guarantee. Payment guarantee is actually implemented popularly at Agribank. Others guarantee types include guarantee for capital loan, warranty, maintenance… They occupy a considerably large share: 15.86% in 2005, 4.11% in 2006 and 27.39% in 2007. The reason of guarantee balance’ decline in 2006 is that the payment guarantee contract with Vinashin individually reaches USD 2,998,975.5 which raises payment guarantee balance to 79.27% and so reduces others’. The others guarantee balance peaks at VND 25,863 million (27.39%). It reveals that the new guarantee types has been added in guarantee operations at Agribank. A chart of guarantee types’ balance below may make the issue clearer. * Economy sectors in guarantee structure (according to guarantee balance) Table 4 Unit: VND million Customer type Year 2005 2006 2007 Joint stock company 15 5,850 27,967 Individual 0 248 1,104 State-own company 6,762 7,140 17,780 Co-operative 0 45,083 9,359 Limited company 15,538 6,458 12,037 Foreign bank 2,282 0 14,248 Foreign company 0 3,173 11,978 (Source: Guarantee Activities report of the Credit Department) As can be seen from table 4, customer types of guarantee operations at Agribank are getting more and more various. In 2005, there are only state-own company (SC), joint stock (JSC), limited (ltd) company and foreign bank participating in guarantee activity at Agribank. The main guarantee balance in this year is from SC and Ltd Company. In 2006, there are other three types added in guarantee customers at Agribank: individual, foreign company and co-operative. Guarantee balance from JSC rises rapidly by VND 5,835 million. SC’s also increases lightly but ltd company’s declines. Co-operative appears in 2006 as the main customer for its enormous contribution to guarantee balance of VND 45,083 million. 2007 is the year of all customer types in guarantee operations. Guarantee balance grows considerably for every customer type. JSC’s especially rises 5 times compared with in 2006. It is simply because many companies go public in this year and they all realize the importance of guarantee activities. In addition, guarantee balance of foreign company and foreign bank tend to be growing. With the full member of WTO position in 2007, it is not complex to understand. Customers from these sectors will certainly be greater in 2008. In conclusion, Agribank has attached importance on diversifying customer types. It aims to keep traditional customers and attract more new ones from various economy sectors. 2.4. ANALYSIS OF GUARATEE ACTIVITIES AT AGRIBANK OPERATION CENTER Guarantee is just a "toddler" in the Agribank services as well as other Vietnam banks. Binh, D.D. (2006).Guarantee operations and its position in Vietnam commercial banks. Bank Magazine, 5. However hard it has tried and achieved, much to be done. 2.4.1. Achievements: Although guarantee is only the fledging service and carried out in a short period, it contributes remarkably to the Agribank such as increasing the turnover, diversifying the business operations and extending the service forms. Guarantee activities partially meet the market demand and takes part in the economic development. Futhermore, in 2004, Agribank issued the credit manual which assigns sufficient guarantee operations procedure. It facilitates the credit staffs to perform guarantee operations and reduce the possible mistakes. In the guarantee process, thanks to applying appropriate and adequate guarantee operations procedures, the guarantee items of Agribank are very safe without making the payment function for any guarantee contract. In recent years, the revenue of guarantee grows more and more, particularly, from VND371million to VND758 million (2006-2007). It demonstrates the Agribank position in promoting domestic and international commercial transactions, assisting the development of business operations, quality improvement, and market control and competitiveness enhancement. The gradual rise of guarantee balance highlights the progress of guarantee in the bank services. In recent years, guarantee balance increases and the latter year’s amount grows much more than the year before. In particular, it grows from VND27,170 million in 2005 to VND94,473 million in 2007. This service appeals more and more customers. At first, the customer often comes from state-owned enterprises and limited companies. From the late of 2006, in addition to the traditional ones, there are more from private companies, joint-stock enterprises, foreign office representatives, foreign banks and individuals. There is no co-operative and foreign company participating in guarantee activities at Agribank in 2005 but in 2006 the guarantee balance of co-operative is VND45,083 million and foreign companies is VND11,978 million in 2007. Together with turnover improvement, Agribank pays attention to intensify the quality based on profit and safety. In three year 2005-2007, the bank does not have to settle any debt on behalf of the customers. This criterion helps the Operation Centre not only do business effectively but become prestigious to enterprises as well. In the last few years, the increase of flourishing guaranteed companies (for instance Vinashin, Vietnam Machinery Installation Corporation, Vinavico JSC) and the possible projects makes the good signal for the economy. 2.4.2. Weakness: Besides the crucial achievements, guarantee operations at Agribank need to make massive efforts to overcome disadvantages. Guarantee duration: The calculation of guarantee duration is not accurate and appropriate to the contract period. Operation Centre is usually required to guarantee in a shorter period than the contract implementation’s rate of progress. For example, the guarantee duration with Vinavico JSC is 10 months while the contract period is 3 months longer. Hence, the guarantor comes up against difficulties in carrying out completely the commitment. In borrowing capital guarantee, sometimes the customers are unable to take capital back because the capital turnover does not end but the loan has come to deadline. So it is difficult for them to clear debt on time. This problem can lead to the danger of the breach of contract and Agribank may be forced to pay reluctantly. Guarantee forms: The decision number 283 of Agribank refers to many guarantee forms: bid bond, performance bond, and advanced payment guarantee, warranty guarantee, borrowed capital refunding guarantee, product quality guarantee, maintenance, repayment guarantee. In fact, Agribank only implements 5 of them and concentrates on the 3 most popular ones: bid bond, performance and payment guarantee. The guarantee forms have not actually been diversified yet. In addition, much demand for new guarantee forms arises such as security issue guarantee, bill of exchange guarantee and tariff guarantee yet Agribank has not put down in writing and instructed to follow through. Guarantee scope: Almost guarantee operations only stop in inland scope. There are several international guarantee contracts with foreign banks and companies but they do still not meet the market demand and the bank has not improved its ability to a high degree. The guarantee balance of foreign companies just occupy about 20% of the total guarantee balance in 2007 when this number reaches the peak. Guarantee conditions: Requiring customers to deposit 100% is not reasonable because it fails to promote security and financing function of bank guarantee and Agribank may be unable to attract more new customers. With regard to mortgage, Agribank has not been brave enough to accept because the assessment and complaining process meet with obstacles of mortgage regulation, assessment standard and so on. Guarantee fee: The same fee is applied for everyone so it lacks flexibility. It has not reflected properly the risk of guarantee bank as well as customer policy. Instead, guarantee fee should depend on cost rate, guarantee duration and the guarantee amount of money. Guarantee letter form: Agribank issued several forms of guarantee letter. It, however, often provides some forms the customers require, which pushes the bank into disadvantage especially in foreign trade transactions as their guarantee letter does not comply with any model. As a result, it takes the bank much time to examine and correct. Guarantee assessment process: To produce results in guarantee operations, it is essential to assess the financial situation of the project, which decides the success or failure of the project. Nevertheless, the project assessment methods are not updated, still simple and unilateral to catch up with the diversified business market nowadays. They pay little attention to analyzing risks and working out the investment expenses. In fact, the project assessment at Agribank and others are formalistic without care. The assessment has just based on targets, figures and formula passively. Sometimes, the assessment of key showings is examined incomprehensively without basing on sufficient investigation, scientific base of the project itself but of the mortgage only. Qualification of training staffs: Staffs at Agribank have not been professionally qualified about guarantee. For some people, "Guarantee" is still confusing. So they seem to think that the more guarantee contracts are, the more guarantee fee they receive. It is very dangerous and the bank