35 SOLUTIONS TO IMPROVE THE EFFICIENCY OF CREDIT ACTIVITIES FOR POOR HOUSEHOLDS AND POLICY OBJECTS AT THE QUANG NINH BANK FOR SOCIAL POLICIES

MINISTRY OF FINANCE
ACADEMY OF FINANCE
--------------------

STUDENT: LÊ MINH TRANG
GROUP: CQ55/51.01

GRADUATION THESIS
TOPIC:
"SOLUTIONS TO IMPROVE THE EFFICIENCY OF
CREDIT ACTIVITIES FOR POOR HOUSEHOLDS AND
POLICY OBJECTS AT THE QUANG NINH BANK FOR
SOCIAL POLICIES."

Major

: English for Finance and accounting

Student code

: 17522202010027

Hanoi – 2021


MINISTRY OF FINANCE
ACADEMY OF FINANCE
--------------------

STUDENT: LÊ MINH TRANG
GROUP: CQ55/51.01

GRADUATION THESIS
TOPIC:
"SOLUTIONS TO IMPROVE THE EFFICIENCY OF
CREDIT ACTIVITIES FOR POOR HOUSEHOLDS AND
POLICY OBJECTS AT THE QUANG NINH BANK FOR
SOCIAL POLICIES."

Major

: English for Finance and accounting

Student code

: 17522202010027

Supervisor

: M.A Pham Thi Lan Phuong

Hanoi – 2021


Academy Of Finance

Graduation Thesis
DECLARATION

I, Le Minh Trang, being a student of Faculty of Foreign Languages, hereby certify
my authorship of the thesis submitted today entitled:

Thesis: “Solutions to improve the efficiency of credit activities for poor house
holds and policy objects at the Quang Ninh Bank for social policies.”
I declare that the thesis and the study presented in it are my own and have been
generated by me as the result of my own original research.
Hanoi, May, 2021
Student

Le Minh Trang

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis
ABSTRACT

Many studies provided evidence of the positive impact of credit activities for poor
households and policy objects. In most cases, the studies have focused on the direct
effects of credit on household income and expenditure. In this study, the author
would like to exam the effect of credit on quality of life in Quang Ninh province as
a part of study to find out whether this program has positive impact on the clients.
At the same time, from there, discover the remaining limitations in this part of the
program, make recommendations to overcome and build the reputation of the Social
Policy Bank.

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis
ACKNOWLEDGMENTS

A completed study would not be done without any assistance. Therefore, the author
who conducted this research gratefully gives acknowledgement to their support and
motivation during the time of doing this research.
First of all, I would like to express my endless thanks and gratefulness to my
supervisor Ms. Pham Thi Lan Phuong - Head of the Foreign Language Department
of the Academy of Finance. Her kindly support and continuous advices went
through the process of completion of my thesis. Her encouragement and comments
had significantly enriched and improved my work. Without her motivation and
instructions, the thesis would have been impossible to be done effectively.
I acknowledge my thankfulness to all staffs at Quang Ninh Bank for Social Policies
who have supported, helped and provided me valuable suggestions and data during
internship period. Without their helps, it would be impossible for me to finish this
thesis.
I also would like to show my sincere thanks to all the lecturers in the Faculty of
Foreign Languages of Academy of Finance for tireless devoting time and efforts to
enrich, broaden and deepen my knowledge over the past four years. My heartfelt
gratitude goes as well to the Faculty of Foreign Languages of Academy of Finance
for giving me the opportunity and permission to implement this thesis. I
furthermore thank to all the lecturers who will mark and give constructive
comments on this thesis.
My special thanks approve to my parents, my colleagues and my friends for their
advice and encouragement to me. I also deeply thank to all the people whose direct

and indirect support assists me to accomplish my thesis in time.
Thank you all, in advance.

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis
LIST OF ABBREVIATIONS

HEPR
VBSP
WB
IMF
BRI
IOS
S&LO
BSP

Lê Minh Trang

Hunger eradication and poverty reduction
Vietnam Bank for Social Policies

World Bank
International Monetary Fund
Bank Rakyat Indonesia

International Organization for
Standardization
Saving and Loan Office
Bank for Social Policies

CQ55/51.05


Academy Of Finance

Graduation Thesis
LIST OF TABLES

Table 1: Summary of credit funds for the period 2018-2020...................................22
Table 2: Lending results from the credit programs for the period (2018 - 2020).....25

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis
TABLE OF CONTENTS

DECLARATION........................................................................................................i
ABSTRACT..............................................................................................................ii
ACKNOWLEDGMENTS........................................................................................iii
LIST OF ABBREVIATIONS...................................................................................iv

LIST OF TABLES.....................................................................................................v
TABLE OF CONTENTS.........................................................................................vi
INTRODUCTION.....................................................................................................1
CHAPTER 1: LITERATURE REVIEW...................................................................3
1.1.

Overview of Bank in the market economy...................................................3

1.1.1.
1.2.

Definition of Bank.................................................................................3

Current types of banks in Vietnam...............................................................4

1.2.1.

Commercial banks.................................................................................4

1.2.2.

Investment banks...................................................................................4

1.2.3.

Development banks...............................................................................4

1.2.4.

Cooperative Banks................................................................................4

1.2.5.

Policy Banks..........................................................................................5

1.3.

Bank Operations...........................................................................................5

1.3.1.

Credit and the role of credit for the poor and beneficiaries of social

welfare ............................................................................................................... 5
1.4.

The Vietnam Bank for Social Policies (VBSP)............................................8

1.4.1.

Emergence and characteristics...............................................................8

1.4.2.

Some countries with banks operating in accordance with a typical form

like Vietnam Bank for Social Policies...............................................................10
1.5.

Credit quality.............................................................................................12

1.5.1.

Definition............................................................................................12

1.5.2.

Criteria for assessing credit quality.....................................................13

1.6.

Factors influencing the operation efficiency..............................................16

1.7.

Factors affecting the quality of the operation.............................................17

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

CHAPTER 2: THE STUDY....................................................................................18
2.1.

Vietnam Bank for Social Policies (VBSP) operational situation in Quang

Ninh province from 2018 to 2020........................................................................18
Vietnam Bank for Social Policies' organizational structure and operation
network in Quang Ninh province......................................................................18
2.1.1.................................................................................................................. 18
2.1.2.

Loan capital.........................................................................................20

2.1.3.

Lending methods.................................................................................20

2.2.

Current situation of preferential credit to the poor and to the beneficiary of

social welfare at VBSP branch in Quang Ninh province......................................22
2.2.1.

Delivering targets on credit funds........................................................22

2.2.2.

Implementing credit programs, serving the social and economic

development objectives of the Province............................................................24
2.2.3.

The implementation of the partnership with associations, unions and

the Entrustment results......................................................................................33
2.3.

General assessment....................................................................................34

2.3.1.

Achievements:.....................................................................................34

Some existing and underlying causes.........................................................36
2.3.2.................................................................................................................. 36
2.3.3.

Experience and lessons........................................................................38

CHAPTER 3: RECOMMENDATIONS..................................................................40
3.1.

Recommendations to the State...................................................................40

3.2.

Recommendations to People's Committees at all levels.............................40

3.3.

Recommendations to the Board of Directors of VBSP...............................41

3.4.

Recommendations to the Savings & Loans group......................................41

3.5.

Recommendations to the entrusted associations and mass organizations...42

3.6.

Recommendations to VBSP Quang Ninh Branch.......................................42

CONCLUSION.......................................................................................................44
REFERENCES........................................................................................................45

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis
INTRODUCTION

1. RATIONALE OF THE STUDY
Poverty is a global social issue. After more than 30 years of the implementation of
Doi Moi, which was initiated and led by the Communist Party of Vietnam, the
economy has achieved a variety of crucial achievements. The country is advancing
tremendously on the path to industrialization and modernization as well as
international integration; People's lives are increasingly being improved and

enhanced; The economy and national status have recorded remarkable
advancements. However, we are facing a huge and complicated challenge, which is
also a global issue, including: economic recession; monetary inflation, price
escalation; People's lives, especially the poor, people with low incomes, those who
live in remote areas, etc., are even more difficult. Part of the population, especially
people in rural, highland, remote, and island areas, etc., are subject to poverty, many
of whom have not yet met the minimum standards of living. The gap between rich
and poor is complicated, which is being concerned by the whole society.
There are various causes of poverty such as natural disasters, epidemics, social evils,
etc., but the key reason is the lack of business capital granted to the poor. Therefore, it
is defined by the Party and State that: Bank credit is an indispensable link in the
system of socio-economic development policies for hunger eradication and poverty
reduction (HEPR) in Vietnam. At the 5th Central Committee Meeting (Session VII),
our Party has proposed HEPR policy: "The poor shall be supported mainly through
capital lending and business direction. Funds for HEPR will be raised in each locality
and the State will also assist the people by taking advantage of domestic and
international humanitarian aid. Efforts to increase the number of rich households will
be made and HEPR policy will be motivated, etc.” (1). With the implementation of
the Party's HEPR policy, on October 4, 2002, the Prime Minister issued Decree No.
78/2002/ND-CP on Credit for the poor and other beneficiaries of social welfare;
Decision No. 131/QD.TTg established the Social Policy Bank (VBSP), on the basis
of reorganizing the former Bank for the Poor to carry out loan policies for the poor
households and other beneficiaries of social welfare.

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

With the knowledge acquired during the time I studied at the Academy of Finance,
and participated in the internship, I see that credit effeciency is still low, affecting
credit quality for the poor and beneficiaries of social welfare. Therefore, how they
can receive capital and use loans effectively, with credit quality still ensured for the
sustainable development of credit capital; and how the poor can break the cycle of
sustainable poverty and go towards justified enrichment remain an issue of concern
for the whole society.
With the above reasons, I choose the topic: "SOLUTIONS TO IMPROVE THE
EFFICIENCY OF CREDIT ACTIVITIES FOR POOR HOUSEHOLDS AND
POLICY OBJECTS AT THE QUANG NINH BANK FOR SOCIAL POLICIES."
2. AIM OF STUDY
The aim of this study is to point out the difficulties and limitations of credit. At the
same time, the researcher propose solutions to further improvement of credit
efficiency for poor households and beneficiaries of social welfare at VSBP Quang
Ninh branch.
3. METHODS OF THE STUDY
To collect data for this study, tools as document review, observations are used.
4. SCOPE OF THE STUDY
Due to a limit in time, the scope of the study is confined to Quang Ninh province in
the period from 2018 - 2020 with focus on the following loan programs: Loan
program for unemployment assistance; Loan program for the disadvantaged
students; Clean water loan program; Social housing loan program; Employer loan
program for workers during Covid-19.
5. ORGANIZATION OF THE STUDY
The thesis is divided 3 chapters:
Chapter 1: Literature review
Chapter 2: The Study

Chapter 3: Recommendations

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

CHAPTER 1: LITERATURE REVIEW
1.1. Overview of Bank in the market economy
1.1.1.

Definition of Bank

The emergence and development of bank are associated with the development of
the commodity economy. It is also one of the most important economic and
financial institutions in the economy. There are numerous types of banks, depending
on the development of the economy in general and the financial system in
particular.
Also, there are different definitions of Bank. In an e-lecture at The Pennsylvania
State University, Bank is defined as a business that takes in and preserves money
owned by other individuals and organizations, and then lends this money for
economic activities such as profit-making or simply to cover their operating costs.
According to Thomas P. Fitch (2012), author of Dictionary of banking terms: "A
bank institution is usually a company licensed to receive deposits, make loans, pay
checks and perform related services for the population”. This definition focuses
mainly on the services that a bank provides for customers, which is also the main

activity of current banks.
As for Vietnam, according to Article 4 of Law No. 47/2010 / QH12, Credit
Institutions of the Socialist Republic of Vietnam stipulate: “Bank is a type of credit
institution that can implement all banking activities in accordance with this Law.
Based on the nature and objectives of operations, Bank is classified

into

commercial banks, policy banks, and cooperative banks ”and“ Operation of a bank
includes regular provision of one or more of some of the following services:
Deposit facilities; Credit extension; payment on account. ”
Currently, there are many definitions and conceptions of Bank, but in general, there
has been a unified and specific view. Bank is a financial institution that offer the
most diverse portfolio of financial services - particularly credit, savings and
payment services - and perform a variety of certain financial functions compared to
any business organizations in the economy (2).

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

1.2. Current types of banks in Vietnam
Bank can be divided into various types, depending on operational requirements.
However, due to limited research capacity and time, researchers will only follow
Law on Credit Institutions where these types of banks are defined:

1.2.1.

Commercial banks

Commercial banks have existed and developed in association with the development
of the commodity economy. The significant growth of commercial banks also has a
positive impact on the market economy, helping to promote the economy, culture
and society.
According to Law on Credit Institutions: Commercial banks are credit institutions
that can carry out all banking activities such as currency trading, and common
banking services such as receiving deposits before using them to provide credits,
supplying payment facilities and other related business activities for profit purposes
in accordance with the Law on Credit Institutions and other provisions of the law.
(Decree No. 59/2009 / ND-CP of the Government on organization and operation of
commercial banks).
1.2.2.

Investment banks

Investment banks operate with medium and long-term investment objectives, also
for the general development purposes but through indirect investment in valuable
papers.
1.2.3.

Development banks

Banks focus on mobilizing medium and long-term capital for development. The
activities mainly focus on direct investments in projects.
1.2.4.

Cooperative Banks

Cooperative bank means a bank of all people's credit funds established by people's
credit funds and a number of legal entities contributing capital under the provisions
of this Law for the primary purposes of systematic integration, financial support and
capital regulation in the system of people's credit funds.

Lê Minh Trang

CQ55/51.05


Academy Of Finance
1.2.5.

Graduation Thesis

Policy Banks

Policy bank means a State bank, operating not for profit, but serving customers
according to the State's priority policy. Capital sources mainly come from the State
Budget's capital, capital mobilization, capital issue, attraction of term and demand
deposits, from granting projects funded or borrowed from the Government and
non-governmental organizations of other countries.
1.3. Bank Operations
Banking operations are the regular supply of one or a number of operations such as
receiving deposits, extending credit, and implementing payments on account. In
addition, banking operations also include investment planning, operations related to
trust, brokerage, guarantee, savings, cash management, and insurance. However,
due to the limited time and for further issues, the researcher only dwell on credit

activities.
1.3.1.

Credit and the role of credit for the poor and beneficiaries of social welfare

1.3.1.1. Concept and Characteristics of bank credit
The concept of credit in broad terms: Credit is the temporary transfer of the right to
use a certain amount of resources from one party to the other wherein after a certain
period of time, the second party must repay or return an amount of value greater
than the original amount. Credit has emerged and developed with the production of
goods. In a narrow sense, “Bank Credit is a transaction of an asset (money or
goods) between a bank and a borrower (individuals, businesses and other entities)
wherein the bank transfers the property to the borrower for use within a certain
period of time as agreed, the borrower is responsible for unconditional return of
principal and interest to the bank when the payment is due ” (3). According to the
Law on Credit Institutions No. 47/2010 / QH12, “Credit extension is an agreement
allowing organizations and individuals to use an amount of money or a commitment
allowing the use of an amount of money in the form of lending, discounting,
financial leasing, factoring, bank guarantee and other credit operations”.

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

Credit was born at the onset of labor division and social class stratification, with the

initial manifestation that the rich practiced usury on the poor. When the commodity
economy developed, it appeared that at the same time, some people temporarily had
excess capital and some were temporarily short of business capital. Due to a
limitation on time and space, it was difficult for them to meet each other. As a
result, the banks, with their credit activities, act as an intermediary, takes the money
of the surplus capital, and lends money to those in need.
Credit is characterized by a number of specific points which will be stated as
follows: First, there is the transfer of a quantity of resources from the lender to the
borrower. Here, the lender only passes the right to use the resources to the borrower,
not the ownership. This characteristics is the most obvious feature of credit, and is
the basis for other characteristics. Second, there is a credit period, which provides
some time for the borrower to finish their work. At the end of that period, the
borrower must return both principal and interest to the lender. Third, when making a
refund, the borrower must always pay an amount greater than the original value.
That is the interest paid to the lender, which is a very specific characteristic of
credit, compared to other commodities. Fourth, credit must be based on the trust
between the lender and the borrower. Only when the lender truly trusts the
borrower's willingness and ability to repay the debt can a credit relationship be
established. Finally, bank credit always contains risk factors and is the riskiest
business sector. The risks come from borrowers who might be subject to business
losses, frauds or face legal risks. Another factors such as mechanisms and policies,
natural disasters, enemy-inflicted losses, borrower’s status, etc., also threaten the
ability to repay credit capital to the Bank. At the same time, market volatility is also
responsible.
1.3.1.2. The role of credit for the poor and beneficiaries of social welfare:
Whether a country is developed or still developing, no matter how strong its
economy is, the truth is, there are always people who fall into poverty and
difficulties. To limit and narrow the wealth gap, social stability has always been the

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

goal in every nations. Credit for the poor and beneficiaries of social welfares in
Vietnam is stated in Decree No. 78/2002 / ND-CP dated October 4, 2002 by the
Prime Minister: “… Credit for the poor and other beneficiaries of social welfare is
the use of financial resources mobilized by the State to give preferential loans to the
poor and other beneficiaries of social welfare to serve production, create jobs and
improve lives; contribution to the implementation of the national target program on
hunger eradication, poverty reduction and social stability” (Article 1 Decree
78/2002 / ND-CP)
Among many reasons leading to poverty, the main and basic one is lack of
capital and lack of business knowledge. Capital, techniques, and business
knowledge are the "keys" for the poor to thrive. However, due to insufficient capital
and difficult circumstances, many people are unable to go to school, so they lack
knowledge self-innovation, thus poverty always clings to them.
Therefore, bank credit is practical and plays a vital role in the society. First, bank
credit is the driving force to help the poor overcome poverty. Vietnamese people are
known for their industriousness in labor and frugality, so if they have the capital to
restore their fields and raise livestock, there will be an absolute chance of escaping
poverty. Second, bank credit provides a certain amount of loan so people will not
have to resort to usury thus improving their economic performance. The poor, under
difficult circumstances, have to be engage in usury to make ends meet and as a
result, become a victim of heavy exploitation. Their life become even more
difficult. Bank credit also facilitates education standards to help the poor access the

market and have conditions for production and business activities in the market
economy; Finance the poor through Hunger Eradication and Poverty Alleviation
programs, and through credit channels of recovery of both capital and interests,
borrowers will have to think carefully what crops to plant, what livestock to raise,
what jobs to do and how to do a highly productive business. Thus, they will be more
proactive and innovative in production and business activities. Third, bank credit
contributes directly to the transformation of the agricultural and rural economic
structure, and implement the redistribution of social labor. In agriculture, new
Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

scientific and technical measures should be applied to production to bring about
high economic efficiency. The transformation of the structure of plants and
livestock and the introduction of new high-yielding varieties into production
practice should be carried out on a large scale. Thus, the investment credit for the
poor has directly contributed to the restructuring of the rural economy through the
application of scientific and technical advances in production, creating new
professions and services in agriculture and promoting the redistribution of labor in
agriculture and labor for the whole society. Fourth, bank credit helps reducing social
evils resulting from unemployment and excessive free time. Finally, bank credit
creates bonds among people, allowing people to share and learn production
techniques, and family financial management.
The results of economic development have transformed economic life in rural areas;
political security, social order and social safety have been maintained, which help

reduce negative aspects in society, changing the face of the countryside for the
better.
1.4. The Vietnam Bank for Social Policies (VBSP)
1.4.1.

Emergence and characteristics

At Resolution No. 05-NQ/HNTW, dated June 10, 1993, the 5th Conference of the
7th Party Central Committee, on continuing to innovate and develop rural socioeconomic performance, our Party advocates credit regimes for poor households,
households of social welfare, and those living in poor regions, ethnic minority
areas, highlands, revolutionary base regions; our Party also advocates the numerous
forms of unsecured loans for poor households
To implement the Law on Credit Institutions in implementing credit policies for the
poor and beneficiaries of social welfare; resolutions of the 9 th National Congress,
the resolution of the 6th session of the 9th National Assembly on the early
completion of the organization and operation of the VBSP, separating preferential
credit from commercial credit; at the same time, implementing commitments with
the World Bank (WB), International Monetary Fund(IMF) on the establishment of

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

the Policy Bank; On October 4, 2002, the Government issued Decree No. 78/2002 /
ND-CP on credit for the poor and other beneficiaries of social welfare. The Prime

Minister signed Decision No. 131/2002 / QD. -TTg on the establishment of VBSP
on the basis of restructuring of Bank for the Poor, separated from Vietnam Bank for
Agriculture and Rural Development.
VBSP was established to implement a preferential credit policy for the poor and
other beneficiaries of social welfare. The operation of VBSP is not for profit and is
guaranteed solvency by the State; the compulsory reserve ratio is 0%, and it is not
required to participate in deposit insurance. In addition, VBSP is exempt from taxes
and other amounts payable to the State Budget.
VBSP is entitled to performing: capital mobilization, lending, payment operations,
budgeting and acceptance of trust funds for preferential loans from local
governments, economic and socio-political organizations, non-governmental
organizations, and domestic and foreign individuals investing in economic
development projects.
Besides, VBSP provides poor households, near-poor households and beneficiaries
of social welfare with access to preferential credit, which facilitates production,
creating jobs, improving their income and living conditions, escaping poverty, and
contributes to economic development policies associated with hunger eradication
and poverty reduction, ensuring social security, with the goal of wealthy people,
strong country, democratic, fair and civilized society.
Objects eligible for preferential credit loans from VBSP under Decree No.
78/2002 / ND-CP (October 4, 2002) include: (i) Poor households; (ii) Poor students
who are attending universities, colleges, vocational schools; (iii) Objects in need of
borrowing capital to create jobs in accordance with Resolution 120/HDBT of April
11, 1992 of the Council of Ministers (now the Government); (iv) Beneficiaries of
social welfare who go to work abroad for a definite period; (v) Economic
organizations and production and business households located on islands; objects in
mountainous area II and III and those under the Program on socio-economic

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

development of communes with extreme difficulty in mountainous, remote and
isolated areas (Program 135); (vi) Other objects under the decision of the Prime
Minister. In order to receive capital from VBSP, besides the current regulations of
the State and the Government's regulations on credit for poor households and other
beneficiaries of social welfare, customers must be on the list of poor households
decided by Commune-level People's Committees according to the poverty standards
announced by the Ministry of Labor, Invalids and Social Affairs. Customers’
background shall be reviewed by the savings and loan groups, who later create a list
with certification of the commune-level People's Committee. Up to now, VBSP,
with the expansion of lending objects, has 23 loan programs.
1.4.2.

Some countries with banks operating in accordance with a typical form

like Vietnam Bank for Social Policies
Poverty has always been a worldwide concern. Bank for Social Policies are not
present in every countries, because its existence depends on social circumstances
and the political and legal characteristics of each country. Besides Vietnam, there
are also a number of banks operating for special purposes in the world.
Take Grameen Bank - Bangladesh as an example: Grameen-model village banking
was established by Professor Muhammad Yunus, with capital coming from poor
customers (94%) and the State (6%). Its purpose is to benefit the poor, especially
women living in rural, remote, and extremely difficult areas. The establishment of

Grameen Bank stems from one of his projects: he gave 43 small households a loan
of $ 27 to create small things for sale without collateral. He believes that the poor
have the capacity to work but lack capital. A loan, though small, can help them
generate income, improve their lives, and affordability. Bank lending operates on
the basis of trust without collateral, which means there is no legal binding between
the lender and the borrower. To ensure the repayment of the loan, Muhammad
Yunus gathered groups of poor people, called "solidarity groups", including 5
members with similar background in each group. The groups operate with the aim
of sharing business experience, monitoring and managing each other. Grameen

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

banking model stimulates creativity, self-exploration and effective use of capital,
household self- production (such as cultivation, livestock and poultry skills).
Moreover, financial and savings management skills are also improved to to help
repay loans to banks on time (4).
Another example is Bank Rakyat Indonesia (BRI), which was established in 1895
and officially nationalized in 1950. In the 1970s, 3.600 Desas BRI units (village
banks) were created to carry out the Agricultural Development Assistance Program
and act as an agent for the Government Subsidized Loan Programs. In 1984, BRI
was restructured and had access to microfinance, operating according to market
principles and applying sustainable interest rates. In 2003, BRI listed and became
the largest microfinance bank in Indonesia. Up to now, the BRI has built a

nationwide network. Savings are an indispensable component of BRI operations
where savings of any amount are received, withdrawal mechanism is flexible and a
positive real interest rate is always ensured. In particular, the BRI has many policies
to encourage borrowers (mostly the poor) to have savings deposit, and at the same
time reward borrowers who repay their loans on time. This is the reason why lowincome people are particularly fond of BRI's services. The beneficiaries of BRI are
very diverse, mainly small businesses that operate retail activities for the poor
(46.7%). Customers who are particularly poor are not directly served by BRI,
however, BRI affiliates participate in Government programs to generate income for
farmers and fishermen. Borrows at BRI are required to be collateral with some
assets, which are flexible and loosened for reputable customers. The loan repayment
is flexible, periodically (can be monthly, quarterly or yearly), depending on the
agreement between the bank and the customer in order to reduce risks for
customers. (5).

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

1.5. Credit quality
1.5.1.

Definition

There are various definitions of "Quality", for example: Quality is the level of
conformity of a product to consumer requirements.

"Quality is Conformity to Requirements" (6)
"Good quality means a predictable degree of uniformity and dependability with a
quality standard suited to the customer" (7).
With the above definition, the quality of bank credit must meet the requirements of
customers, and stakeholders including society and banks. For customers, credit
quality is shown when the borrowing purposes of customers are met; quantity, term,
interest rate and repayment period are reasonable; procedures are simple and
understandable; and compliance with laws and credit principles is ensured. For
Banks for Policies, though banks for policies do not operate for profits like other
commercial banks, the goal of ensuring credit quality is always on top. There is no
close relationship between risks and profits like other commercial banks, but to
ensure the timely return of capital (principal and interest) according to regulations,
as well as minimize overdue debts and bad debts, continuous improvement of credit
quality is required. For socio-economic development, credit quality contributes to
production, goods circulation and people's lives; addresses unemployment issues,
and accelerate the process of industrialization and modernization.
Thus, "credit quality" is simply understood as “totality of features and
characteristics of a product or service that bear on its ability to satisfy the
reasonable loan needs of customers; including: complying with the credit policy;
ensuring safety and creating economic efficiency for the Bank, and at the same time
contributing to the socio-economy as a whole. In banking business, credit quality is
a category used to reflect the risk level of a loan portfolio to a credit institution,
which is called loan quality” (8).

Lê Minh Trang

CQ55/51.05


Academy Of Finance

1.5.2.

Graduation Thesis

Criteria for assessing credit quality

To assess the credit quality, two groups of criteria are considered: qualitative
indicator and quantitative indicator.
1.5.2.1. Qualitative indicators
On the customer side, qualitative indicators are based on the timely response to
customer needs, customer service satisfaction, and the timeliness of credit offers
from the Bank.
On the Bank side, they reflect the compliance with law and the State Bank's
regulations, the principles, the credit extension process, and the Bank's periodic
credit policies. However, people often do not rely on these criteria to assess credit
quality because they mainly depend on customer perception and experience, and
management of the Bank's credit officers.
1.5.2.2. Quantitative indicators
The assessment of credit quality will be more convincing when using these
indicators. Based on actual statistics of the Bank, this group includes the following
indicators overdue debt ratio, the number of households who have from poverty,
and the total number of poor households who have escaped from the poverty line:
Firstly, we look at overdue debt ratio
DEBT ratio (%) = Overdue debts / total debit balance
Overdue debt is a debt that the borrower (either individual or corporate) cannot pay
both principal and interest on the due date as committed in the credit contract.
Customers who fall into the group of overdue debts (as classified on CIC - Vietnam
National Credit Information Center) will have difficulty getting loans from banks or
other credit institutions. Accordingly, high overdue debt ratio means that many
loans are misused by customers; debts are due but for numerous reasons, cannot be

recovered. Therefore, banks' capital is affected, but other poor households also do
not have the opportunity to borrow capital for production and business. This is a
very important indicator because it reflects the use of capital and customers’ ability
to repay debts to the credit institution. The overdue debt ratio is inversely related to

Lê Minh Trang

CQ55/51.05


Academy Of Finance

Graduation Thesis

the credit quality. More specifically, lower level of overdue debt ratio indicates the
improvement of credit quality, and the poor are more likely to get access to capital
recovery: Since the credit relationship is the relationship of "borrowing and
repaying" between customers and banks, to enhance credit quality, principal and
interest recovery of the bank should be as high as possible. However, in reality,
there have been cases where customers borrowed money from the SOCB, but they
did not use it for the right purpose, which is cultivation and breeding, and kept it to
themselves until the due day of repayment (this situation occur in mountainous
provinces). Accordingly, it can be seen that the bank still ensures capital recovery,
but in terms of customers’ capital use efficiency, the quality is not guaranteed. From
there, we can consider adding other criteria.
The number of households who have from poverty counts as the second indicator: A
household that has escaped the poverty line is a household with a per capita income
higher than the current poverty standard, and is no longer on the list of poor
households; They have the ability to thrive and improve their life.
And the last indicator in the list is the total number of poor households who have

escaped from the poverty line. This is calculated by:
Number of poor households listed at the beginning of a period - Number of poor
households listed at the end of a period - Number of poor households listed at the
beginning of a period who migrate to another place + Number of poor households
newly listed in a period.
This indicator shows how the credit activities of VBSP have contributed to the
poverty reduction and the objectives of credit for the poor, which are getting them
to access to production capital to escape poverty; reducing unemployment and evils;
contributing to social stability. Therefore, the total number of poor households that
have escaped the annual poverty line has partly proved the effectiveness of credit
activities.
Since the characteristics of policy credit is different from commercial credit:
commercial banks has the right to choose customers,

Lê Minh Trang

while for the other, if

CQ55/51.05


Academy Of Finance

Graduation Thesis

someone is a beneficiary of social welfare, VBSP will create conditions for him/her
to enjoy their preferences. Therefore, VBSP have to seek customers for their
lending services, and they can neither ignore a certain area nor leave out an object.
Therefore, it is important to increase lending and ensure that everyone in the group
is served and has access to State incentives. Therefore, the following criteria should

also be mentioned: Cumulative number of poor households getting loans; the
proportion of poor households getting loans compared to the list that has been
surveyed and announced; and the work efficiency of the Saving and Loan Office
(S&LO).
The cumulative number of poor households eligible for loan application shows that
the number of poor households eligible for credit loans over the total low-income
families across the country. The standard is based on quantity in which the number
of households is measured by the accumulated number of home borrowers from the
first to the last in the reporting period.
The total number of poor households = the accumulated number of borrowers of the
previous period + the accrued number of borrowers of the reporting period.
This criterion is followed by the proportion of poor households eligible for loans.
This criterion is evaluated in terms of the credit operations' quantity, which equals
the ratio between the total low-income families eligible for loans over the total of
poor households by standards.
The percentage of poor households eligible for loans = the total of poor families
eligible for loans per the total enlisted poor households.
And the final criterion is the work efficiency of the Savings and Loan Office
(S&LO).
The Savings and Loans Office is considered as an extension of the Bank for Social
Policies (BSP). Many tasks in the loan process of the BSP are commissioned to
social and mass organizations and entrusted to the Savings and Loans Office,
namely: screening and selecting borrowers; supervising and urging borrowers to use
loans in line with the intended purpose and with efficiency; urging the borrowers to

Lê Minh Trang

CQ55/51.05

Academy Of Finance

Graduation Thesis

make on-time payments of loans and interests. Thus, the work efficiency of the
trustee and commission operations of these partners are of great significance to the
credit quality of the BSP.
1.6. Factors influencing the operation efficiency
Credit operations for economically disadvantaged households are high-risk
activities. Apart from natural causes such as natural disasters, floods, agricultural
plagues, etc., which often take place on a large-scale basis with incredible damage,
others stem from the lack of knowledge of the business operation, unconsumable
products, poor competitiveness. Overall, there are three main factors influencing the
operation efficiency:
To begin with, the cumulative number of times poor households can borrow loans
shows that the number of poor households that have used credit capital out of the
total number of poor households in the country. This is the criterion for assessing
quantity. This criterion is accumulated from the first borrowing household to the
end of the period needing to report the results.
The second factor is the total number of poor households that got loans, which is
calculated by:
The cumulative number of households that got loans by the end of the previous
period + accumulation of number of households that have been borrowed in the
reporting period.
The third factor is the proportion of poor households that have access to loans
This is the quantitative assessment criteria for credit work; is equal to the total
number of poor households that can borrow money out of total poor households
according to the published standards.
Proportion of poor households that have received loans = total number of poor
households that have received loans / total number of poor households listed.

Finally, the quality of Savings and Loan Groups (Savings and Loan Groups) also
has an impact on the operation efficiency. Savings and loan groups are like the
extended arm of VBSP. Many work contents in the lending process of VBSP are

Lê Minh Trang

CQ55/51.05