Luận văn Improving credit limit system in Vietcombank

nches; - 01 Training center - 1 overseas representative office; - 3 domestic subsidiaries: - 1 overseas subsidiary in Hong Kong; - 209 transaction department - 4 joint- venture enterprises. Vietcombank has become one of the most modern banking institutions in Vietnam. With an integrated advanced technology system connecting all of its products and services, Vietcombank is able to provide customers with modern and high quality banking products and services. Structure of Vietcombank: Organizational structure of the VCB, after equalization, is built toward the model of Parent company with the key bond is the commercial bank-the parent one, which is the major field of business activities; The VCB shareholders have the rights and responsibilities to VCB and to all the enterprises, which is owned, dominated, invested by VCB. As directed by government, the Subsidiaries of the VCB will be equalization to diversify forms of ownership, utilize the experience of strategic partners, especially the foreign strategic partners ... to contribute to building and development of VCB. Accordingly, investors can hold shares in these enterprises, or VCB, or both, and have rights and responsibilities under the Charter of that unit. Chart 2.1: VCB structure (Parent company structure) 45% of Joint venture Life insurance 50% joint venture bank VCB Leasing Company Vinafico in Hong Kong VCB Securities Company VCB Fund Management Company Non-life insurance (Proposed) VCB Fund management of Investment in infrastructure development Company (proposed) Asset Management Company Finance & credit Pledge Company (proposed) Finance & consumer credit Company (proposed) Enterprises & commercial banks dominated by VCB Reinsurance Company VCB Money Transfer (proposed) VCB Card Company (Proposed) 16% Joint-stock VCB-Bonday 70% Joint-stock VCB Tower 52% Joint-stock VCB-Bonday-Ben Thanh Real estate Investment Company Fifth Road Joint-stock Company Infrastructure investment Company (Proposed) VCB Training center VCB Institute – Academy (Proposed) The Parent Company Vietnam joint-stock bank for Foreign Trade (Vietcombank) Government The VCB Staff shareholder Foreign strategy investor (in negotiation) Domestic Investors . (Source: Introduction about Vietcombank on websitehttp//:www.vietcombank.com.vn) By the VCB Restructure technical associated project, which was funded by WB and the Government of Netherlands through the management of SBV, VCB has developed their own model for organization and pattern management practices, in accordance with international best practices The VCB operation model is divided into blocks of activities, subjects to the unified management from Head office to affiliates as follow: Chart 2.2: VCB structure (Operation structure) CEO & Senior Management System of function dept in Head Office and branch network Risk Committee Other Committee Congress Shareholders BOM & BOD Internal audit Controllers Committee Risk Management Committee Credit Committee Internal Inspectorate Other Committee Treasury&Trading Group Retail business Group Risk Mngmt & Impaired Assets Mngmt Group Operation Group Supporting depts Financial Group Wholesale business Group (Source: VCB Credit manual) In fact, Vietcombank is gradually applying organizational models mentioned above as well as the pattern in corporate governance standards and international best practices today. And now, under the direction of Government, VCB is preparing the conditions for formation of corporation finance investment in VCB organization model and management in accordance with international best practices (model Corporation financial investment - Financial Holdings). It is expected that in the year 2020, VCB will officially switch to model of Financial Holdings Vietcombank’s major performance indicators Through 5 years from 2004-2008, Vietcombank has achieved many targets about the development in total assets, outstanding loans, funds mobilization, equity and profit... In December 31st, 2008, VCB has total outstanding debt of about 108.534 billion VND, total mobilized capital 221.950 billion USD and equity reach about 13,790 billion VND. With net income reached VND 2.536 billion in 2008, the ratio of profit after tax on equity of VCB was 18.03% (the highest ratio in comparison to the 4 biggest banks in Vietnam in 2008). From 2006 to 2008, VCB net income annual growth was 37.2% in average, total assets was 17.7% per year and raise capital from customers was 12.6% per year. VCB's growth strategy is also supported by a solid capital base with the Capital Adequacy Ratio (CAR) reached 8.9% at December 31st, 2008, higher than the 8% minimum standards prescribed by the SBV to commercial banks. For more details, we can also analysis the VCB business result in period of 2004-2008. Table 2.1: VCB business result in period of 2004-2008. Items Measurement(Unit) Year 2004 2005 2006 2007 2008 Total assets VND Bil 120,006 136,456 167,128 197,363 221,950 Outstanding loans VND Bil 50,199 59,590 66,316 95,405 108,534 Total deposit from customers VND Bil 110,574 122,040 152,124 177,906 196,506 Equity VND Bil 7,181 8,416 11,228 13,528 13,790 Net Profit VND Bil 1,104 1,293 2,861 2,390 2,536 Return on Assets (ROA) % 0.79 0.93 1.37 1.44 1.17 Return on Equity (ROE) % 13.13 15.35 21.12 21.2 18.03 Capital Adequacy Ratio (CAR) % 7.00 9.57 12.60 9.20 8.90 (Source: Balance sheet of Vietcombank) By this table, we can see VCB had a great success in increase its financial indicators. VCB total assets has increased sharply (up to 84.95%) in the period of 5 years. Besides, the credit activities double the scale with over 108 VND bil in 2008 (account for 10% total outstanding loans of Vietnam Bank System). And as the certain, the VCB net profit, ROE, CAR are in good condition in comparison to all the other banks. The profit increased each year, especially in 2006. One of the reasons is the development of security market in 2006 lead to revenue from investment and financial increase significantly. In 2007, after the Director 03/2007/CT-NHNN governing that securities backed lending ratio allowed to account for 3% of bank’s total outstanding loans lead to go down sharply of securities, investment and financial income. As a result, the profit of 2007 is lower than 2006, ROA and ROE also lower. Chart 2.3: Total Assets of VCB in the period of 2004-2008 Chart 2.4: Vietcombank ROA & ROE in 2004-2008 Credit activities at Vietcombank Overview of credit operation at Vietcombank Organizational structure of credit activities at VCB Credit organizations operating in the VCB are classified into two levels: Head office, branch Head office Risk management committee Risk management committee was established to support the Board of Directors in the management of risk. Head of the committee is chairman of the Board. Members of the committee activity sell and often the leader representing the Board or who is assigned in charge of managing the office operations of large field such as Treasury department, Credit management department, Economic analysis department, Technology department... The main task of the committee issuing the policy or the regime set out measures to effectively manage the different types of risks in banking operations, which of course include the type of credit risk use Central Council of Credit Credit Central Council was established to support the Executive Board in the provision of credit products to customers. Chairman is Director-General. Vice-chairman is a deputy general director in charge of credit. Council members are the Chief Manager of credit, investment projects, general economic analysis, customer relationship and rule of law office. The main task of the Council is to consider and decide on the loan beyond the competence of the Director of the ruling branch. Credit management Department Credit management department perform three main duties: monitoring and managing credit risk, guidance and promulgate policies and regimes related to credit activities. Construction plans and credit-oriented activities in each period.  Investment projects department Investment projects department implemented two basic tasks: re-evaluation of investment projects beyond the limit of the ruling branch director, direct lenders to consider the evaluation of major projects in Hanoi and the Northern provinces (except the province has branches VCB) Due Department This department is responsible for the debt management tracking all bad loans (over 180 days), the tracking computing deduction for a reserve fund and handle risks from bad debt reserve fund risk. Evaluate exemptions judgment interest in excess of the branch director Credit Information Department Responsible for monitoring and collecting information related to the prevention of risk in credit activities in particular and in other activities involved. Coordination of activities collected information prevents risks among branches. Synthesis, analysis, evaluation, forecasting and information service activities in the whole credit system and information service management. A relationship transaction to exchange information with other credit institutions, State Bank and other organizations to provide information Customer Relationship Department Managing relationships with some customers in the system Bank for Foreign Trade of Vietnam Legal Department Responsible for legal work related to any of the Bank for Foreign Trade of Vietnam Branch Credit Council in local Council credit in local was established to support the Board of Directors of the branch credit products to customers. Chairman of the credit local is a branch director. Vice chairman is deputy director of the branch in charge of credit or a deputy director of President of the other credit specified. Members of the council are manager of credit department and other members that chairman assigned. The main task of the council credit local is approving credit limit, approving loans in excess of the verdict director or affiliate loans not exceeding the ruling of the branch manager but so complex Credit department, investment projects department Depending on the scale of operation, transaction and its subsidiaries may establish separate rooms of investment projects, loan installment ... case only one branch office of credit, the office responsible for credit review all loan types to clients. Where the branches are more chat rooms are almost the name of the room spoke up duties of the office (e.g. office project developers responsible for review of investment projects, office and medium enterprise lending is responsible for the borrowing for small and medium enterprises). Scale credit activities in the rooms usually offer small, narrow spaces, so do not split into separate rooms set up that credit is only part directly under the Chief Executive's Office direct transactions. Credit policies in Vietcombank Lending Policy to customers VCB’s lending policies are approved and promulgated by The Board. It is also a general legal framework for operation of branches and credit officers. Lending policy bases on: Regulations on loan security are issued by the government and the State Bank of Vietnam Regulations on lending are issued by state banks Vietnam VCB’s strategy, orient in activities Some basic contents of lending policy Lending Objects VCB’s lending poly does not limit any type of customers. Lending policies are applied to all lending objects to keep equality Principle of lending Customers of VCB must follow: Using loan for the right purposes as agreed in the credit contract Repaying principal and interest on time as agreed in the credit contract. Lending conditions VCB considers and decides granting loan when customers are eligible: Have civil legal capacity and capacity for civil acts and subject to civil liability under the provisions of law Have legitimate purposes of using loans Have good financial capacity to ensure repayment in commitment period Have effective and possible investment projects, borrowers in accordance with the provisions of law Implement provisions on loan security in accordance with the Government, the State Bank of Vietnam and VCB Lending rate VCB does not stipulate a fixed rate for lending but empowers branch manager based on demand, ability to repaying capital of VCB and the provisions of the law Interest Rates VCB does not limit duration of loans. Interest Rates are determined based on the production cycle of business, duration of recovery of capital investment projects, the ability to repay the customers, the ability of the bank capital, and time limit allowed business and activities of the customer (for cases active for a limited period) Interest rate VCB applies flexible interest. Head Office does not apply measures to manage interest rate loans to branches, but through specific interest rate for loans and guide non-mandatory. These instructions vary each period and to provide full information on the situation of interest in the whole system as well as on the market, thereby helping branches actively offer a fixed interest rate for benefit. The application of the interest rate for each loan is arranged by a specific branch and customer Interest rate is flexible. Branches have autonomy decision method applied or fixed rate adjustments (periodically, or notice on the international market or by VCB) Loan security VCB own decisions and to consider themselves responsible for their decisions in choosing security measures to mitigate loan risk loans at lowest It should be noted, measures to ensure the loan is defined as measures to increase recovery of loans, rather than the first and the conditions required when considering lending decisions. Problem is the ability to automatically determine repayment of the plan, the project loan Credit activities In Vietnam, credit activity has been affected from many factors such as: the changing policy of the government in each period, the safety in lending, profit pressure... so, credit activities always is the difficult problem, which need to be dealed with by the bank. In solving this problems, Vietcombank has strengthen its credit risk management, improved control over its credit risks, set credit limits for certain branches and notably reduced credit limits of customers having inadequate financial performance. Vietcombank has paid attention on building up lending categories by customers and industries, seriously implementing regional credit growth policy as well as setting bad loans. Besides, Vietcombank continued to complete and amend regulations on credit procedure in line with international best practices. The front- middle- back office credit procedures advised by Technical Assistance Project were selectively implemented at some branches. In the period 2004-2007, with the positive factors of the market, credit-oriented activities is "Strengthening the customer, continue to improve the quality of credit towards international standards" have contributed to credit growth in 2007 increased by 44.12% compared with 2006. In 2008, implementing the direction of the Government and SBV to control credit for contributing to curb inflation, on the basis of evaluating the level of risk of the market, in 2008, VCB has implemented several measures to control control credit growth. With the complicated change of the macroeconomic situation in general and in particular of money market, VCB has continuously adjusted to the credit policies consistent with market conditions to ensure safe operation of credit effectiveness. VCB has quickly taken measures to control credit growth system through direct branches to review and adjust targets credit growth to ensure the growth rate dropped from system 29% to 15%. Ending December 2008, outstanding debt increased by 15.53% compared with VCB plan was adjusted at 15% We can see the below chart: Chart 2.5: Vietcombank ROA & ROE in 2004-2008 Loan structure & classification Loan structure Converting from a bank which specialized in foreign trade, VCB has developed to multi-purpose banks; provide more diversified services to enterprises and individuals operating in all areas, industries in accordance with the development strategy of Government, SBV and strategic development of VCB To enterprises, VCB has implemented to diversified customers – develop customers in all economic sectors, including State-owned enterprises, joint-stock company, FDI) To Small and medium Enterprises: From 2001, VCB has oriented to the SME group. Despite the low level in proportion, this field was invested, oriented to expand the market share. And in fact, its outstanding debts have been increasing since 2006. As of 31/12/2008, The VCB enterprise outstanding debts account for 90.4% of total, while outstanding debts of individuals was only 9.6%. The VCB enterprises customers are mainly the large one with well - trade mark. Its outstanding debts have gains 65,3% of total. In recent years, VCB has also paid more attention on the SME enterprises. At the end of 2008, the SME outstanding debts is 25,1% of total. Table 2.2 : Outstanding Structure by customers No Customers Proportion 1 Enterprises 90.40% General Corporations, Large enterprises 65.30% SMEs 25.10% 2 Individuals 9.600% (Source: Annual report from CIC) Table2.3: Loan structures by industries (Source: Annual report from CIC) No Industries 31/12/2006 (VND bil) Proportion (%) 31/12/2007 (VND mil) Proportion (%) 31/12/2008 (VND mil) Proportion (%) 1 Construction 3,982 5.90% 6,352 6.50% 7,554 6.70% 2 Producing, distributing electricity, gas & water 2,425 3.60% 5,114 5.20% 4,734 4.20% 3 Production processing 23,152 34.20% 37,569 38.50% 44,832 39.70% 4 Mining industry 1,735 2.60% 9,271 9.50% 8,176 7.20% 5 Agriculture, forestry Fisheries 1,979 2.90% 3,614 3.70% 2,414 2.10% 6 Transportation 2,874 4.20% 5,923 6.10% 7,434 6.60% 7 Service & trading 17,484 25.80% 18,560 19.00% 24,992 22.20% 8 Hotel & restaurant 1,680 2.50% 3,305 3.40% 2,842 2.50% 9 Others 12,431 18.30% 7,923 8.10% 9,814 8.70% Total 67,742 100% 97,631 100% 112,792 100% (Source: Annual report from CIC) VCB loan structure expressed the harmony in the fields, in line with the development strategy of economy. Two major sector is Production processing and Service & trading, making up a great proportion with the corresponding rate for 2 category is 39.7% and 22.2%. Chart 2.6: Outstanding debts by industries (31/12/08) Chart 2.7: Outstanding debts by geographic (31/12/08) The VCB network coverage widespread throughout the country. However, The north and south of where are the ratio of outstanding loans are the largest proportion, in turn accounts for 36.0% and 45.3% of total outstanding debt of VCB. Table 2.4: Loan structure by term and currency No Criteria 31/12/06 Proportion (%) 31/12/07 Proportion (%) 31/12/08 Proportion (%) 1 By term 1.1 Short term 37,878 55.90% 51,678 53.00% 59,343 52.60% 1.2 Medium & Long term 29,863 44.10% 45,854 47.00% 53,449 47.40% 2 By Currency 2.1 VND Bil 35,055 51.70% 48,511 49.70% 67,434 59.80% 2.2 USD Mil 2,031 48.30% 3,043 50.30% 2,672 40.20% 3 Outstanding debts 67,741 100% 97,532 100% 112,792 100% (Source: Annual report from CIC) Chart 2.8: Loan structure by term and currency Proportion of medium and long term loans on total outstanding loans in 2006, 2007 and 2008 in turn is 44.1%, 47% and 47.4%. Similarly, the proportion of short-term loans in turn is 55.9%, 53% and 52.6%. For the structure of outstanding debts by currency, the ratio of outstanding loans in foreign currencies on the total outstanding debt in 2006, 2007 and 2008 in turn is 48.3%, 50.3% and 40.2%, proportion of outstanding loans in USD is 51.7%, 49.7% and 59.8% Types of credits Working Capital loan Normally, working capital is short term (less than 1 year). There are two method to lend working capital includes: credit for each application credit (single underwriting) and credit limit. Credit limit only for customers have good relationship in the past with VCB, have good ability to repayment, brand name and good position. Credit limit is set up by FI committee for each period of time. Applying credit limit for customer to ensure lending procedure is more flexible, faster and convenient but higher risk. Credit for each application credit is used for other customers. Medium and long term loan Medium loan is loan with period loan from 1 year to 5 years Long term loan is loan with period loan over 5 years. Project finance loan Revenue from Financial project activities gains quite important share of total revenue of credit. Financial Project loan include project financed only by VCB or finance by many banks. Financial project usually takes place for a long time whereas the most capital fund is short term so creditor needs to analysis finance project more detail, clearly, especially the effective of finance project. Banking Syndicated loan Banking syndicated loan is a group of investment bank which jointly underwrite and distribute a new security offering, or jointly lend money to a specific borrower. A bank syndicate is not a permanent entity but forms specifically to handle a deal that might be too difficult or too risky for a single underwrite or borrower to handle, also called underwriting group or bank syndicated. Installment loan An installment loan is a credit contract where you borrow a certain sum from the bank, and commit to repaying it in regular installments Credit line VCB commit to lend fixed amount for period. Customer can draw or payback money depends on actual operation business in credit line. Credit card (Saving card) VCB commit to lend in card limit to pay for goods/services, cash drawing Overdraft Customer can pay over current account with credit line. This overdraft is considered as short term loan. L/C payment Customer commits to draw account for payment to foreign client without condition whenever enough supporting document. Asset guarantee a) Assets guarantee are current accounts, fixed deposit, saving account, debit note which are issued by VCB b) Assets guarantee are current accounts, fixed deposit, saving account, debit note which are issued by other bank/commercial organizations c) Asset guarantee is mortgage Customer mortgage asset at VCB and VCB has to record and keep asset as guarantee. d) Valuable paper issued by other prestigious credit organization, free from disputes on ownership or any restrictions of ownership. Table 2.5: VCB outstanding debts & result of credit performance Items Measurement Year (Unit) 2004 2005 2006 2007 2008 Outstanding loans VND billion 50,199 59,590 67,724 97,631 112,792 Credit revenue VND billion 4,337 6,344 9,089 11,389 17,457 Credit expenses VND billion 2,440 3,034 5,213 7,289 10,572 Credit profit VND billion 1,897 3,310 3,876 4,100 6,885 (Source: Annual report from CIC) As we see, the trend of VCB credit revenue is growing up. Besides, the profit from credit activities increases continuously and leads to successful result in each year. The implementation of the advanced credit model will certainly lead Vietcombank to develop on a stable basis in the credit market. Profit from credit activities increased year by years. Credit limit system at Vietcombank Structure of the system Credit limit is understood as the total credit that a commercial bank identifies a customer or a group customer of the bank. On the basis of the credit rating for customers, VCB build a reference credit limit system. Reference credit limit is base and orientation to bank identify specific credit limit for each customer depending on type, credit rating of business, scale of investment projects,… Credit limit system includes: Lending limits Lending limit for a customer is the maximum loan that the bank identifies for a specific customer; the loan can be defined as ana maximum rate or an average percentage for the bank's own capital, and within framework limits of the central bank. Besides reference lending limit for each customers, VCB has flexibility provisions for special customers in the exception. Trade finance limits Trade finance limit is defined for customers trading activities with foreign countries such as import-export activities of goods, payment activities, receive aid from abroad... Trade finance limit is defined for each specific type as open L/C without deposit, guarantee without deposit,