Research on factors affecting lending decisions to small and medium-Sized enterprise customers at regional commercial banks - Northwest Vietnam

The author uses the relationships available through family, colleagues and especially

the students of K20 in Finance - Banking class 2011 - 2013 at Northwestern University, (the

trainees are School and currently holding managerial positions in commercial banks) to

distribute questionnaires to 50 credit officers and ask these people to pass questionnaires to

570 credit officers at commercial banks in 4 provinces of the Northwest region. The survey

was conducted from May 2017 to September 2017 and resulted in 355 good responses

reaching 62.2% of the generated samples. According to Cooper and Schindler (2006), the

rate of recall of the questionnaire from 30% to 50% is typical for investigative studies, the

response rate of 80% or more will indicate that the respondents are very interested in the

research topic. Researchers and researchers cannot expect to receive 100% response rates.

Therefore, the response rate of 62.2% (lower than the response rate of the preliminary

survey 100%) of the study is relatively good and acceptable. Furthermore, 355

questionnaires have good data, no error sheets, blanks, omissions, or extreme selective

positive (error sheets = 0), demonstrating the quality of the questionnaire and the very

method of data collection effective with investigative research

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m ercial b a nk s 2 .2 .1 . Th eo ry of info rm atio n a sym m etry (A sym m etric Info rm atio n) Info rm atio n asy m m etry , so m etim es called th e failu re info rm atio n o r im b alan ce of info rm atio n , m ean s of eco n o m ic tran sactio n , o n e p arty h as th e ad v antag e of h olding m o re info rm atio n th an th e oth er , leading to th e d ecisio n th e eco n o m ic in efficien cy . 2 .2 .1 .1 . Ad v e rse selectio n th eo ry of c redit m a rkets (Ad ve rse S electio n) In term s of info rm atio n sy m m etry , m eaning th at o n e p arty in a tran sactio n h as m o re info rm atio n ab o ut b u sin ess objects th an th e oth er p arty , w h o h av e th e ad v antag e of info rm atio n m ay p ro vid e info rm atio n th at is n ot h o n est ab o ut objects allo cated p o o rly tran slated to th e ad v antag es of info rm atio n . A s a result , less d o m in ant p arties ag ree o n th e info rm atio n to co m plete th e tran sactio n and g et thing s n ot as th ey w ant . 2 .2 .1 .2 . M o ral h aza rd in b a nking a ctivity (M o ral h aza rd) P aul (2009) d efin es m o ral h azard as "cases w h ere o n e p arty to m ak e d ecisio n s related to th e acceptable lev el of risk , w hile th e oth er p arty suffer lo sses if th o se d ecisio n s fail " (P aul , 2009) . 2 .2 .2 . Th eo ry of judg m ent a nd feeling in d ecisio n In th e study by B ro w n , M . , M atthias S ch aller , Sim o n e W esterfeld , and M ark u s H eu sler (2012) , m an ag ers in th e w o rld h av e ack n o w ledg ed th at th e m an ag ers "w ithin th e lim its of reaso n , " a nd so , m an ag em ent d ecisio n s are often u n able to fully "ratio n al " . 2 .2 .3 . S o cial capital th eo ry C ran e , D . , and R ob ert E ccles (1988) , H au sw ald , R . , and R ob ert M arq u ez (2006) S o cial capital in clud es so cial n etw o rk s , tru st in so ciety , th e ability to co n n ect to d o th e job . O r im p act o n th e role of so cial capital in d ecisio n s of th e enterp rise fu nd s: h elp enterp rises enh an ce th e rep utatio n and legitim acy . 2 .2 .4 . Th eo ry applicatio n in b a nk credit m a n ag em ent K obil 7C s R u ziev d ev elop m ent m od el 'G o od and 5C s ' B ad (K obil R u ziev (2018) 7 D ia gr a m 2. 3: Th eo re tic a l f ra m ew o rk o f f a ct o rs a ffe ct in g le n di n g de ci sio n s So u rc e: a u th o r' s sy n th e si s A sy m m et ric in fo rm at io n th eo ry Th eo ry o f u n fa v o ra bl e ch o ic es o f t he m ar ke t A pp lie d th eo ry in cr ed it m an ag em en t Th eo ry o f jud gm en t an d pe rc ep tio n in de ci sio n m ak in g So ci al ca pi ta l th eo ry Th eo ry o f e th ic al ris ks in ba n ki n g o pe ra tio n s C o m m er ci a l b a n k cr ed it pr o ce ss Fa ct o rs th a t i n flu en ce th e co lle ct io n pr o ce ss a n d cr ed it in for m a tio n pr o ce ss in g C re di t o ffi ce r Lo a n de ci sio n / de n ia l Th e m o de l o f fac to rs in flu en ci n g le n di n g de ci sio n s Th e ha rd in fo rm at io n fa ct o r Th e so ft in fo rm at io n fa ct o r 8 2.3. Overview of factors influencing SME lending decisions Factors affecting commercial banks' lending decisions are listed by the author as follows: Table 2.9: Overview of factors influencing a bank's lending decision in previous studies Numerical order Influence factor Previous studies (+) Has an influence on the loan decision (-) Does not affect the lending decision 1 Hard information Financial report Berger và Udell (2006) (+) Mason và Stark (2004) (+) Uchida et al (2006) (+) Armstrong et al (2010) (+) Feldma (1997) (+) Mester (1997) (+) Nguyen Anh Hoang (2014) (+) 2 Business plan Petersen và Rajan (2002) (+) Berry et al. (1993) (+) Petersen,MA. (2004) (-) Uchida et al. (2006) (-) Armstrong et al. (2010) (-) Agarwal và Hauswald (2010) (-) Berry et al. (1993) (-) Nguyen Anh Hoang (2014) (+) 3 Business purposes 4 Products, services and potentials, risks (business risks) 5 Knowledge Berry et al. (1993) (+) Uchida et al. (2006) (+) Rand (2007) (-) Coleman (2004a) (-) Le, Sundar, & Nguyễn (2006) (+) Nguyen Anh Hoang (2014) (-) 6 3rd party opinion Berry et al. (1993), (+) Uchida et al. (2006) (+) Nguyen Anh Hoang (2014) (-) 7 Business size Cole và Wolken (1995) (+) Yildirim et al. (2013) (+) Khalid (2014) (+) Vo Tri Thanh (2011) (+) Ricardo (2004) (+) Ha Thi Thieu Dao (2014) (+) Do Thị Thanh Vinh (2014) (+) Le (2012) (+) Malesky & Taussig (2009) (+) Nguyen & Ramachandran (2006) (+) Rand (2007) (+) Nguyen Anh Hoang (2014) (-) 8 Owner characteristics Irwin & Scott (2010) (+) Nofsinger & Wang (2011) (+) Fatoki & Asah (2011) (+) 9 Numerical order Influence factor Previous studies (+) Has an influence on the loan decision (-) Does not affect the lending decision Coleman (2004b) (+) Fatoki & Odeyemi (2010) (+) Osei-Assibey, Bokpin, & Twerefou (2012) (+) Ajagbe (2013) (+) Nguyen Anh Hoang (2014) (-) 9 Collateral Tran Trung Kien (2015) (+) Nguyen Thi Minh Hue (2012) (+) Petersen và Rajan (2002) (+) Uchida et al. (2006) (+) Khung et al. (2001) (+) Petersen (2004) (+) Tran Trung Kien (2015) (+) Nguyen Thi Minh Hue (2012) (+) Nguyen Anh Hoang (2014) (+) 10 Credit history records Uchida et al. (2006) (+) Berger và Udell (2006) (+) Nguyen Anh Hoang (2014) (+) 11 Soft information Trust (ability and entrepreneurial personality) Berger (1998) (+) Berger và Udell (2002) (+) Petersen,MA. (2004) (+) Xin và Pearce (1996) (+) Nguyen et al (2006) (+) Nguyen Hong Ha (2013) (+) Nguyen Anh Hoang (2014) (-) 12 Participation in social networks Ferrary (2003) (+) Harhoff, D. and Körting, T. (1998a,1998b) (+) Nguyen Anh Hoang (2014) (-) 13 Main lending bank Berger và Udell, (1995) (+) Petersen và Rajan, (1994, 1995) (+) Angelini, P. et al, (1998) (+) Scott và Dunkelberg, (1999) (+) Ongena và Smith, (2000) (+) Uchida (2006) (+) Uchida, Hirofumi, Udell, Gregory F. & Yamori, Nobuyoshi (2012) (+) Coleman và Cohn, (2000) (+) Khalid (2014) (+) Vo Tri Thanh (2011) (+) Ricardo (2004) (+) Ha Thi Thieu Dao (2014) (+) Do Thị Thanh Vinh (2014) (+) Nguyen Anh Hoang (2014) (+) 14 Time of relationships 15 Number of bank products 10 Source: Authors' synthesis based on research review 2.4. Research model and hypothesis Hypothesis H1: Commercial banks in the Northwestern subregion use both hard and soft information in approving loan decisions. Hypothesis H2: Soft information plays a more important role than hard information in a bank's lending decision. H2 H1 Figure 2.6: Proposed model and research hypotheses CHAPTER 3: RESEARCH METHODS 3.1. Research design The research order of the thesis is as follows: Table 3.1. Order of research Steps 1. Construction of preliminary scales 2. Scale assessment through in-depth interviews and preliminary survey 3. Formal quantitative research 4. Phân tích số liệu 5. Results and solutions Hard information - Financial report - Business plan in the future - Loan purpose - Business risks - The understanding of the business owner - Third party comments - Business size - Owner characteristics - Collateral Soft information - Faith (Competence, Ethics, Integrity) Social network participation - Major lending bank - Time of relationship - Number of banking products Information serving loan decisions Loan decision Control variables Age, Gender, Education, Position, Experience, Marriage, Number of SME contacts / month, Loan application 11 S o u rce: A uth o r 's resea rch 3 .2 . Q u alitativ e resea rch 3 .2 .1 . Q u alitative resea rch objectives R efin e th e facto rs influ en cing th e SM E lending d ecisio n s of co m m ercial b ank s collected by th e auth o r in th e research o v erview and disco v er n ew facto rs asso ciated w ith th e reality of th e co nte xt of co m m ercial b ank s and SM E s in th e N o rth w est V ietn am . 3 .2 .2 . O bject a nd q u alitative resea rch m eth od s S em i -stru ctu red interview s of 20 p eople: 02 d ep uty directo rs of th e b ank , 08 credit m an ag ers , 10 credit officers of th e B ank . . . In o rd er to en su re th e rep resentativ en ess of rand o m interview sam ple selectio n , th e auth o r ch o o ses ev enly 4 -5 p erso n / p ro vin ce in th e N o rth w est regio n . 3 .2 .3 . Q u alitative resea rch results G en eral co n clu sio n : b asically th e th esis research m od el p rop o sed is app rop riate . Firstly , 100% of credit officers said th at o nly cu sto m ers w h o satisfy th e b asic criteria w ill b e able to access b ank lo an s . A t th e sam e tim e , th o se 15 g uiding facto rs w ere d ev elop ed by th e interview ees into 52 n ecessary info rm atio n attrib utes b ased o n th e actu al b anking op eratio n s , th e p erceptio n s and exp erien ces of th e subjects in th e p ro cess of w o rking lending p artn ers fo r SM E s . S e co nd , th e q u alitativ e research results of 10 m an ag ers and credit officers of co m m ercial b ank s in th e N o rth w est sub -regio n h av e 100% of resp o nd ents app reciate th e role of h a rd info rm atio n in collecting cla ssified info rm atio n . C redit rating s of cu sto m ers , 40% of resp o nd ents m entio n ed th e role of soft info rm atio n a nd revealing th e relatio n ship n etw o rk to h elp SM E s m o re ea sily a ccess b a nk lo a n s . Th ese 52 info rm atio n attrib utes are divid ed into 8 m ain g ro up s by th e auth o r: 12 Table 3.2: Results of qualitative research on factors that are filtered into the research model Proposal of research model Qualitative research results Related theory Expected 1 Business plan Put into research model Adjust the name of factor 1: Information about the business Asymmetric information theory Applied theory in banking credit management Affect 2 Business purposes 3 Products, services and potentials, risks (business risks) 4 Business size 5 Financial report Put into research model Adjust the name of factor 2: Financial information Asymmetric information theory Applied theory in banking credit management Theory of the negative choice of credit markets Affect 6 Collateral Put into research model Adjust the name of factor 3: Information about collateral Asymmetric information theory Applied theory in banking credit management Theory of ethical risks in banking operations Affect 7 Credit history records Put into research model Adjust the name of factor 4: Information about credit history Applied theory in banking credit management Affect 8 Trust (ability and entrepreneurial personality) Put into research model Adjust the name of factor 4: Information about the capacity of business owners Theory of judgment and perception in decision making Applied theory in banking credit management Affect 9 Understanding of business owners 10 Owner characteristics Put into research model Adjust the name of factor 5: Information about the personality of the business owner Put into research model Adjust the name of factor 5: Information about the personality of the business owner Asymmetric information theory Applied theory in banking credit management Affect 11 3rd party opinion 12 Participation in social networks Put into research model Adjust the name of factor 6: Asymmetric information theory Applied theory in banking credit management Affect 13 Pr o po sa l o f r es ea rc h m o de l Qu a lit a tiv e re se a rc h re su lts R el a te d th eo ry Ex pe ct ed In fo rm at io n ab o u t th e so ci al n et w o rk pa rt ic ip at io n o f t he bu sin es s So ci al ca pi ta l t he o ry 13 M ai n le n di n g ba n k Pu t i n to re se ar ch m o de l A dju st th e n am e o f fa ct o r 7: In fo rm at io n ab o u t th e re la tio n sh ip w ith th e ba n k A sy m m et ric in fo rm at io n th eo ry A pp lie d th eo ry in ba n ki n g cr ed it m an ag em en t Th eo ry o f t he n eg at iv e ch o ic e o f c re di t m ar ke ts So ci al ca pi ta l t he o ry A ffe ct 14 Ti m e o f r ela tio n sh ip s 15 N u m be r of ba n k pr od u ct s So u rc e : Au th o r' s re se a rc h D ia gr a m 3. 1: M o de l o f f a ct o rs in flu en ci n g le n di n g de ci sio n s to SM E cu st o m er s a t c o m m er ci a l b a n ks in th e N o rt hw es t r eg io n o f V ie t N a m So u rc e : Au th o r' s re se a rc h In fo rm at io n se rv in g lo an de ci sio n s Lo an de ci sio n s H a rd in for m a tio n : 1. In for m a tio n a bo u t t he bu si n es s 2. Fi n a n ci a l i n for m a tio n 3. In for m a tio n a bo u t c o lla te ra l 4. In for m a tio n a bo u t c re di t h is to ry So ft i n for m a tio n : 5. In for m a tio n a bo u t t he ca pa ci ty o f th e bu si n es s o w n er 6. In for m a tio n a bo u t t he bu si n es s o w n er pe rs o n a lit y 7. In for m a tio n a bo u t s o ci a l n et w o rk in g pa rt ic ip a tio n 8. In for m a tio n a bo u t t he re la tio n sh ip w ith th e ba n k H 1 H 2 14 Specifically, 52 properties have been considered, synthesized and developed by the author as follows: Table 3.3: Attributes in hard information Symbol Properties Source Information about the business DN1 Scale of SMEs Mason,Stark (2004); Petersen,MA.(2004; Petersen,Rajan(200); Berry et al. (1993); Uchida et al. (2006); Cole,Wolken(1995). Nguyen Anh Hoang (2014) DN2 Enterprise brand recognitio DN3 Information about enterprise resources DN4 Management principles and system (strategy, structure, culture, policy) DN5 Business outlook (products and markets) DN6 Business plan DN7 Information about customers, markets, suppliers Financial information TC1 Clear and professional accounting system and reporting Mason,Stark (2004); Uchida et al (2006). Nguyen Anh Hoang (2014) TC2 Revenue and profit of SMEs TC3 Assets and capital resources of SMEs TC4 Cash solvency ratio TC5 Capital structure ratio TC6 Rate of return TC7 Operating ratio TC8 Statements of cash flows Information about collateral TSTC1 Personal assets of business owners in SMEs Uchida et al. (2006); Petersen,MA.(2004). Nguyen Anh Hoang (2014) TSTC2 SMEs' ability to mortgage real estate TSTC3 SMEs' ability to pledge other tangible collateral (different from real estate) Information about credit history LSTD1 Positive credit information in transactions with banks Uchida et al. (2006); Berger,Udell (2006). Nguyen Anh Hoang (2014) LSTD2 The type and value of the mortgage for a loan in the past LSTD3 Negative credit information in transactions with banks LSTD4 The owner was once bankrupt LSTD5 Earnings and other personal financial information of the owner LSTD6 Utility billing record LSTD7 Court rulings related to the business LSTD8 Credit requests from other lenders. Table 3.4: Properties in soft information Symbol Properties Source Information about the capacity of business owners NLCSH1 Business owners have an educational background Berry et al. (1993) ; Uchida et al. (2006); Ravina(2008); Petersen,MA.(2004); Petersen,Rajan(2002); Khung et al. (2001); Ferrary (2003); NLCSH2 Business owners have experience in the business sector NLCSH3 Business owners have experience in management NLCSH4 Business owners have the ability to make plans NLCSH5 Business owners use modern technology in business management NLCSH6 A business owner is good at selecting and managing 15 Symbol Properties Source necessary resources Berger (1998); Berger,Udell (2002); Ajagbe (2013) Nguyen Anh Hoang (2014) NLCSH7 Business owners are good at understanding market changes NLCSH8 Business owners make a positive impression on the bank by demonstrating their knowledge and skills. Information about the personality of the business owner TSCSH1 Business owners show a positive reception of banking procedures Khung et al. (2001); Ferrary (2003); Berger (1998); Berger,Udell (2002); Ajagbe (2013) Nguyen Anh Hoang (2014) TSCSH2 Business owners are introduced as integrity (from a third party) TSCSH3 Business owners voluntarily share honest and sensitive information with the bank TSCSH4 Business owners have good experience working with banks TSCSH5 Business owners adapt their interests with those of commercial partners TSCSH6 Business owners pay attention to the needs of employees. TSCSH7 Business owners are completely honest in the negotiation process with trading partners TSCSH8 Business owners are consistent with their actions and decisions. Information about your business's social network participation MLXH1 Business owners have a solid personal network with banks and other financial institutions Berry et al. (1993) ; Uchida et al. (2006); Petersen(2004); Ferrary (2003); Berger, Udell (2002); Petersen,MA. (2004). Nguyen Anh Hoang (2014) MLXH2 Business owners have a solid personal network with government officials MLXH3 Business owners have a solid network with other entrepreneurs in other businesses MLXH4 Relationship with customers MLXH5 Relationship with supplier Information about the relationship with the bank MQHNH1 Number of years the business owner has a relationship with the bank Uchida et al. (2006) Nguyen Anh Hoang (2014) MQHNH2 The owner / business used to borrow from your bank MQHNH3 The owner / enterprise has the same outstanding balance at another bank MQHNH4 Your bank is the primary bank of the SME MQHNH5 The amount of products the entrepreneur uses at your bank 16 Source: Author's research 3.3. Quantitative research 3.3.1. Quantitative research objectives - Verifying the reliability of the scale through Cronbach’alpha coefficient> 0.3 and EFA analysis in preliminary survey, proposing the official questionnaire. - Descriptive statistics on factors included in the research model affecting a bank's lending decision. - Test the reliable EFA of the official scale - Identify factors influencing the bank's lending decision to SMEs in the Northwest region. - Using regression model to quantify the relationship of hard and soft information factors that affect a bank's lending decision. 3.3.2. Design of quantitative research Selection of quantitative research methods: survey methods. Building scale: Level of Likert scale with 5 levels (Nguyen Anh Hoang, 2014) Survey Table: Part A is the questions about the characteristics of the surveyed object, Part B is the questions related to the objective of testing research hypotheses. Table 3.5: Summary of 08 groups of factors after qualitative research Biến Chỉ báo Hard information Information about the business DN1, DN2, DN3, DN4, DN5, DN6, DN7 Financial information TC1, TC2, TC3, TC4, TC5, TC6, TC7, TC8 Information about collateral TSTC1, TSTC2, TSTC3 Information about credit history LSTD1, LSTD2, LSTD3, LSTD4, LSTD5, LSTD6, LSTD7, LSTD8 Soft information Information about the capacity of business owners NLCSH1, NLCSH2, NLCSH3, NLCSH4, NLCSH5, NLCSH6, NLCSH7, NLCSH8 Information about the personality of the business owner TCCSH1, TCCSH2, TCCSH3, TCCSH4, TCCSH5, TCCSH6, TCCSH7, TCCSH8 Information about your business's social network participation MLXH1, MLXH2, MLXH3, MLXH4, MLXH5 Information about the relationship with the bank MQHNH1, MQHNH2, MQHNH3, MQHNH4, MQHNH5 Table 3.6: Factors affecting, coding the question and choosing suitable scales Factor Survey question Encode Selection scale Information about the business Scale of SMEs DN1 Likert 1-5 Enterprise brand recognitio DN2 Information about enterprise resources DN3 Management principles and system DN4 Business outlook DN5 Business plan DN6 Information about customers, markets, suppliers DN7 17 Factor Survey question Encode Selection scale Financial information Clear and professional accounting system and reporting TC1 Likert 1-5 Revenue and profit of SMEs TC2 Assets and capital resources of SMEs TC3 Cash solvency ratio TC4 Capital structure ratio TC5 Rate of return TC6 Operating ratio TC7 Statements of cash flows TC8 Information about collateral Personal assets of business owners in SMEs TSTC1 Likert 1-5 SMEs' ability to mortgage real estate TSTC2 SMEs' ability to pledge other tangible collateral TSTC3 Information about credit history Positive credit information in transactions with banks LSTD1 Likert 1-5 The type and value of the mortgage for a loan in the past LSTD2 Negative credit information in transactions with banks LSTD3 The owner was once bankrupt LSTD4 Earnings and other personal financial information of the owner LSTD5 Utility billing record LSTD6 Court rulings related to the business LSTD7 Credit requests from other lenders. LSTD8 Information about the capacity of business owners Business owners have an educational background NLCSH1 Likert 1-5 Business owners have experience in the business sector NLCSH2 Business owners have experience in management NLCSH3 Business owners have the ability to make plans NLCSH4 Business owners use modern technology in business management NLCSH5 A business owner is good at selecting and managing necessary resources NLCSH6 Business owners are good at understanding market changes NLCSH7 Business owners make a positive impression on the bank by demonstrating their knowledge and skills. NLCSH8 Information about the personality of the business owner Business owners show a positive reception of banking procedures TSCSH1 Likert 1-5 Business owners are introduced as integrity (from a third party) TSCSH2 Business owners voluntarily share honest and sensitive information with the bank TSCSH3 Business owners have good experience working with banks TSCSH4 Business owners adapt their interests with those of commercial partners TSCSH5 Business owners pay attention to the needs of employees. TSCSH6 18 Factor Survey question Encode

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