Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch

Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013


MASTERs OF FINANCE AND CONTROL
THESIS
Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank
for Industry and Trade - Hanoi branch
Prepare by: NGUYEN Quang Duy
Supervised by: Prof. ABADIE Laurence
1
JEAN MOULIN LYON 3 UNIVERSITY VIETNAM UNIVERSITY OF COMMERCE
Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
Hanoi – August 2013
ACKNOWLEDGEMENT
I would like to express my gratitude to all those who gave me the possibility to complete this
thesis.
Foremost, I would like to give my sincere thanks to my tutor, Prof. ABADIE Laurence for
her patience, motivation and enthusiasm. Her guidance helped me in not only studying well but also
choosing the thesis topic. The comments and remarks she shared with me were tremendously helpful
and valuable for the learning, writing and completion of this master thesis.
Furthermore, my special thanks go to Mr. Vu Manh Chien, who is in charge of the Program
for Vietnamese master students, for his suggestion of ideas and introduction of thesis topics to us. He
has also given to all of us great support throughout the entire course so that we could have best
condition to study.
I would also like to express my sincere gratitude to our International and National Teachers
and Professors who have willingly shared and given us their precious and immense knowledge and
experiences during the course. Thanks to their teaching we became higher developed in personal

capacity to more successfully fulfil our career.
My great thanks go to the leaders of VietinBank – Hanoi Branch for allowing me time to
participate in the master course as well as providing with valuable data for my thesis.
Last but not least, I would like to give my special thanks to my friends and my family for
their support that enabled me to complete this work.
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CONTENTS
Page
I. INTRODUCTION 5
II DEVELOPMENT 7
Chapter 1 THE BASICS OF CREDIT APPRAISAL FOR COMMERCIAL
BANK
7
1.1. General concepts about investment projects and credit appraisal of
commercial bank
7
1.2. Quality of credit appraisal of commercial banks 21
Chapter 2 ACTUAL SITUATION OF CREDIT APPRAISAL FOR
PROJECTS IN THE FIELD OF PETROLEUM IN VIETINBANK
24
2.1. Some general information about Vietnam Joint stock commercial bank
for Industry and Trade – Hanoi branch
24
2.2. The status of the evaluation quality of the investment project of the
petroleum sector in Vietinbank and Hanoi branch
27
Chapter 3 ACTUAL SITUATION OF CREDIT APPRAISAL FOR

PROJECTS IN THE FIELD OF PETROLEUM IN VIETINBANK
AND HANOI BRANCH WITH SPECIFIC EXAMPLE
32
3.1. Project brief 32
3.2 Oil reserves and potentials 34
3.3. Assessment of equity transfer process 34
3.4 Transfer method 35
3.5. Capital transfer methods of PVEP 38
3.6. Project progress 38
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3.7. Market and the product consumption methods 39
3.8. Total investment and capital investment appraisal of the project 39
3.9. Project’s financial efficiency assessment 41
3.10 Project’s risks assessment and mitigation 42
3.11. Tentative benefits of Vietinbank Hanoi Branch in case the loan is
approved
45
Chapter 4 EVALUATION QUALITY OF CREDIT APPRAISAL FOR
PROJECTS IN THE FIELD OF PETROLEUM AND OFFER
SOLUTION TO IMPROVE THE QUALITY AS WELL AS
LIMITATIONS OF THE EVALUATION OF THE RISKS
46
4.1. Results in credit appraisals in the field of Petroleum 46
4.2. Drawbacks in credit appraisals 46
4.3. Impacting factors 49
4.4. Considering solutions 51
III. CONCLUSION 55

IV. REFERENCES 56
V. ANNEX 57
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
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I. INTRODUCTION
Vietnam is, in many ways, a developing country. Its economy in general and banking sector
in particular, are growing fast. In such a developing economy as Vietnam’s, financial activities are
facing lots of difficulties caused by both objective and subjective factors.
In countries with developed financial activities, banks’ turnover comes from diverse sources.
In Vietnam, however, this comes mainly from credit activities. Credit project appraisal process is,
therefore, extremely important to banks. It is considered a decisive element in identifying banking
system’s risks.
Previously, loans granted to giant state corporations (eg to Petrolimex) were always regarded
as safe and risk-free ones. However, in recent years a lot of those corporations have confronted
numerous difficulties caused by economic recession, resulting in huge losses for banks. Plenty of
state giants have expanded their business into areas in which they have no experience, leading to
losses. As a result, the government must assist them. This makes it more difficult for the banking
system to do business, especially in appraising credit projects.
Well-appraised projects are those that help banks not only be able to duly and adequately
collect the money they have lent but also to sift and classify projects so as to minimize the wastage
of public funds, contributing to socio-economic stability and sustainable growth but also to the
implementation of government macroeconomic policies, including those on optimizing national
economy’s structure, creating jobs for labors, improving people’s life quality, enhancing national
economic relations, expanding international economy, and speeding up industrialization and
modernization process.
The current heavier investment in inefficient projects in general field, especially of large
petroleum groups, is a threat to economic growth and commercial banks. This is the reason why
appraising investment projects in this field should be strictly carried out in order to guarantee the

efficiency of both banks and their customers.
Appraising an investment project, under the investor’s provisions, means to assess the
investor’s ability, technology, market and financial status, of which financial assessment is the most
vital factor in lending decisions.
Credit appraisal for projects in Vietnam Joint stock commercial bank for Industry and Trade
(VietinBank), especially Hanoi Branch’s, has always received attention in recent years so as to meet
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
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2013
the demand for huge capital of investment projects in various economic sectors, including gas and
petro one.
The above mentioned arguments made the author choose the topic on “Credit appraisal for
projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade -
Hanoi branch” for this thesis.
In the structure of returns of Commercial banks in Vietnam, return from credit plays the most
important role. Thus, commercial banks in Vietnam, Vietinbank included, always put credit
evaluation top so we can be sure that we make the best investments in effective and low-risk
projects.
It is reported that, almost 30% of Vietnam GDP is made by Petroleum. That’s the reason why
Vietinbank has been concentrated on creating credit for this field.
In the credit process, credit analysis is the most important step. It determines the quality of
credit entities. A qualified credit product usually minimizes the default risk and the risk of bad debt
expense. Yet, a highly conservative credit analysis will eventually prevent the flow of lending. Thus,
the balance between quality and flexibility in credit analysis has a great impact on the business.
Big institutions as PVN are always one of the potential clients with the tremendous sponsors
from the government. However, these institutions recently have ineffectively used their capitals
(such as misuse of investment, ineffective capital management). It leads to high records of bad debt
expenses. Some had enormous consequences to the economy as a whole, and particularly the
banking system, such as Vinashin, Vinalines. Thus, credit analysis is becoming more and more

important, and difficult.
My research purpose is clarifing the theory of credit appraisal on investment and financial
projects; Applying and bringing up the actual market problems on credit appraisal for appraisal
activities. Besides, I research one credit situation of Vietinbank HN Branch for customers in the field
of Petroleum and find the way to improve the quality as well as limitations of the evaluation of the
risks based on the facts.
The Research Subjects is a project in the field of Petroleum in Vietnam Joint stock
commercial bank for Industry and Trade - Hanoi branch. One of Vietinbank’s specific lending
projects in petroleum field is: the loan for acquiring 50% equity of Block No 67 Oil Mine in Peru.
My Methodologies are applying these theories of investment and management risk, these
statistical methods, comparison of data, synthesis Systemizing diagrams based on real data in the
field of Petroleum, particularly based on the banking data and reports to assess the appraisal process.
Besides, analyzing critical points for specific projects due to personal experiences of expertise.
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II. DEVELOPMENT
CHAPTER I: THE BASICS OF CREDIT APPRAISAL FOR COMMERCIAL BANK
1.1. GENERAL CONCEPTS ABOUT INVESTMENT PROJECTS AND CREDIT
APPRAISAL OF COMMERCIAL BANK
1.1.1. Concepts about investment project
a. Concept
Investment activities are conducted multistage with diversified economic characteristics,
normally in the form of one or more investment projects. Some projects have a huge capital
requirement, on a certain time, in a long-time framework, and complex project management and
operation. As a result, a seriously active preparation process should be conducted, and investment
should be viewed as separated projects to be achievement-oriented. Investment projects could be
considered in various manners:
Investment projects, in form of documents, are a method to present operating activities and

costs in a detailed and systematical way to achieve certain desired results and future goals.
For businesses in general, investment projects combine related activities, which are planned
to achieve defined objectives in a given time-frame using certain resources.
On the management perspective, investment projects are a management tool, monitoring the
use of capital, materials and labor to create the financial as well as economic - social results in a
long-time framework.
On the planning perspective, Investment projects are a useful tool to plan in detailed a
business that can lead to economic-social developments and be the prerequisite for future investment
decisions and funding activities.
For commercial banks, an investment project is a funded project on the basis of credit
appraisal of commercial bank. In other words, it is the amount of money that commercial banks loan
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to businesses or investors on the agreed terms to implement a particular investment project of the
investor.
b. Investment project requirement
An investment project that is compelling and attractive to participants must ensure the
following basic requirements:
- The project must be scientifically sound. This is the most important element of investment
projects. It ensures the success of the project development and implementation. It is shown on the
following criteria:
o Data and information transparency accuracy of the project must be guaranteed. That
is the data and information must come from originated sources.
o Project elements should not be considered separately but in an interrelationship as a
whole. Therefore, the project planning process must be implemented logically and
coherently.
o Measurements calculation must be simple and accurate.
- Projects must fulfill the due diligence process. It must be licensed by the competent

authorities before implementation.
- The project must be realistic, meaning that it has the ability to deploy its applications in
practice.
- The project must be considered under the consensus of benefit among related parties to
ensure its consistency.
- The last criterion is predictability. Projects must be based on estimations of production, costs,
prices, revenues, profit, etc. Thus, the aggregate amount is estimated. In practice, there is never a
situation where the estimates are exactly correct. In some cases, outcomes are much different from
project estimations.
c. Project classification
Investment projects are classified according to many different criteria depending on
management objectives, organization, investment plans
- Based on the operating characteristics, investment projects are classified into:
o Investment projects in manufacturing, services that are easily to payback
o Infrastructure, social and cultural investment projects
o Regional economic development investment projects
- Based on the collaterals of the loan, investment projects are classified into two sub
categories:
o Investment projects without collaterals: projects that do not require the use of assets
as collateral but based fully on financial situation, management capacity, faith on the
customer relationship and the effectiveness of the project itself.
o Investment projects with collaterals: projects that require assets, mortgage or the use
of third party guarantee as collaterals for the loan.
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- Based on the project’s time frame, investment projects are classified into:
o Short-term projects: projects that have a borrowing period shorter than 12 months,
and the use of the loan are mainly to maintain current assets or short-term liquidity need of

the customer.
o Medium, long-term projects: projects that have a borrowing period longer than 12
months. These projects use the loan to obtain noncurrent assets such as plant, properties,
equipment replacement, infrastructure, etc.
- Based on the Government decree 112/2006/ND-CP on management of investment
projects on construction, investment projects are classified into 4 sub categories: national-level
projects that are passed by the National Assembly on the policy, and three other A-, B-, C-level
investment projects to effectively governance and actively manage the project implementation
process.
Besides, there are various classification methods depending on the project nature and
importance.
d. Characteristics of commercial bank’s project lending
Project lending satisfies the medium, long term financial need of customers to enhance
productivity through expansion investment, replacement investment, etc. The costs of these kinds of
investment include plans, properties, installment, machines, equipment; or the incremental of current
assets to serve the project.
Project lending satisfies the total financial requirement for a project (current and noncurrent
assets investment for the project), creates a financial leverage, ease the shortage of long-term fund.
Project lending assures the customer ownership over their assets over the lending period
compared to financial lease.
Lending process is based on the financial effectiveness of the project measured by the
project’s net present value (NPV) and the project’s internal rate of return (IRR).
Project lending process is implemented according to the current stage of the project.
Project lending must be considered under the aggregate relation of the project elements to
ensure the total timeline of the project, guarantee the payback period.
Project lending contents include the value of equipment, goods, machines, and other costs for
customers to implement a business project and expanding their projects, taking out the interest cost
of the banking loan in the period when projects are under construction and noncurrent assets are not
ready for the medium-and-long-term noncurrent-asset projects that the interest are based on the
value of that noncurrent asset.

e. Process of commercial bank’s project lending
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The project lending process of commercial banks is often implemented in three stages: project
appraisal, lending period, and collection period.
Project appraisal:
Investors create a project, considering all the project’s funding resources to make the best
funding decision. Investors who have the funding need send their documents to commercial banks,
including legal documents, documents of financial situation of the investor, project documents, and
other related documents. After receiving all the necessary documents from customers, the
commercial bank will implement the project appraisal process, including the necessity of the
investment, project goals, technical issues, economic-social issues, and financial issues to consider
the feasibility of the project. After the appraisal process, the commercial bank will reconsider the
investment project based on its own measurements to make the final decision. If the project is not
feasible, the commercial bank will document its customer; clearly define its reason for rejection.
Other than that, the commercial bank will accept the customer’s document and begin the lending
contract.
Lending implementation:
After the success of the project appraisal, the commercial bank will announce the loan and
create credit contracts, and other related contracts. After completing legal procedures of the lending
process, the commercial bank must ensure that the loan is ready according to the project’s stages
agreed in the contract. In this process, the commercial bank must monitor the project implementation
to timely recognize and solve any problems.
Loan repayment:
After the loan is delivered in full and the grace period, the commercial bank will announce its
repayment schedule to its customer. In the agreed period according to the loan contract, the
commercial bank will collect its principals, interests, and any agreed fee when they due. According
to the bank’s announcement, the investor will repay the principals, interests, and fee. Parties must

discuss and timely find a solution if there is any difference from the agreed contract.
Among the three stages above, the project appraisal, especially the project financial appraisal is
the most important stage that will be the core of the investment process.
1.1.2. Concepts about credit appraisal
a. Concepts
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Project appraisal is a process of objectively, scientifically and thoroughly analyzing all
economic and technical contents of the project, in the context of natural, economical, and social
environment that leads to the final lending decision.
The project appraisal satisfies different goals due to the party that consider the project:
For the investor, separately implementing the appraisal project while creating the project
bring a more objective point of view of the project, realize the pros and cons of the project and
resolve them.
For the government authorities in the investment and construction fields, the appraisal goal is
to assess the suitability of the project to the industrial, local and national development in four
aspects: target, scope, plan and effectiveness.
For financial and banking institutions, the purpose of project appraisal is to draw accurate
conclusions about the feasibility, economic efficiency, solvency and potential risks of the project to
make the lending decision. Based on the available information and project appraisal experiences,
financial and banking institutions can actively advice investors to adjust and improve the missing
contents of the project, enhancing the project efficiency. Besides, project appraisal is the basis to
decide the loan amount, the lending period, the appropriate collecting level, ensuring the
effectiveness of the project, as well as the repayment timeline.
However, projects are often viewed from the investor’s perspective regardless of thoroughly
consideration. Thus, the appraisal process must be separately and objectively implemented to ensure
its economic and social benefit. Project appraisal is considered the criticized process of the project
planning process.

b. Content
To ensure the reliability and persuasiveness of the project, credit appraisal must be
considered thoroughly. The process must competently and exactly address the issues raised in each
project. Some core contents include:
- Legality of the project:
Legality of the project is an important element for the project to be smoothly implemented and
operated. The object of the project should not be included in the government blacklist of illegal
goods and services. Legal documents that should be considered when conducting the project
appraisal process include establishment document, investment license, design approval, other
documents relating to the project such as geological result, environment impact assessment,
exploitation license, etc.
- Project’s necessity and goal:
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The project’s necessity and goal must be the first issue to consider for a project. This is the
most important consideration of a project appraisal. When considering the project’s necessity and
goal, these issues must be addressed:
o Does the project goal suitable with and meet the industry, local, and national
objective?
o Is the necessity of the business development meet the increasing demand of the open
market economy? How will the project benefit the investor and the economy if it is
conducted?
o Assessment of the supply-demand relationship and future prediction; address the
project’s ability to participate in the market and potential development.
- Technical Appraisal of the investment project:
The project technology is an important factor to consider when planning the project. This is
the prerequisite for the economic-financial analysis of investment projects. There is no possible way
to conduct the economic-financial analysis without technical and technological data; although the

relationship seems to be the other way around. Projects that are technically impossible should be
eliminated to reduce potential damages in the future implementation and operation.
The technical appraisal of a project includes:
o Location appraisal: this is one of the important aspects of the appraisal. Factors that should
be considered are: the project location should be closed to input sources or its main market;
convenient transportation, suitable delivery costs; available infrastructure, such as road, port,
electricity, etc. to reduce investment costs. Premises must be suitable with the current capacity
and potential development in the future.
o Scale appraisal: analyzing current and potential demand for the project’s product; capacity of
the product in the comparison with market acceptability, the ability to meet capital demand, the
availability of raw materials, machinery, and equipment, as well as the project management
ability.
o Technology and equipment appraisal: this is the determinant factor to the product quality.
Equipment is the key factor of fixed assets that directly influence the product quality and the
production process. Thus, the project must clearly address the criteria for technology, machinery,
equipment, measurement of technology transfer, etc.
o Input appraisal: This is the determinant factor to the project efficiency. Thus, the aggregate
level for core inputs such as energy, electricity, water, etc. should be carefully estimated in a
competently analysis.
o Scale and Capacity appraisal: the suitable design and arrangement of the property to the
chosen technology should be considered thoroughly to ensure the efficiency of the production
process. On the basis of the technical requirement and capacity level, capital requirement for
each item of the project will be rechecked.
o Design appraisal: the project must meet the technical requirement, sustainability, the
application of construction criteria and standards, etc.
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- Economic and social impact of the project

The first target of an investment project to any investor is profit. Thus, project’s profitability
is the benchmark for the attraction of the project. However, in fact, the project’s profitability and
financial safety does not guarantee its economic, social and environment benefit. The economical
element of the project is the social benefit that the project could create. That means this aspect
should be considered for every project.
Economic appraisal will review the project’s economic and social goal. The project’s
economic goal is the direct benefit of the investor. The project’s social goal is the social benefit of
the project. Economic and social appraisal, to the commercial bank, is one of the factors that
determine the lending decision. If the project show no economic and social benefit, it will be very
hard for the investor to get the investment license and the bank loan.
- Market impact of the project
Market appraisal helps the investor determine the most potential product for his project, and
the main market for that product. To the bank, market appraisal helps determine the product’s ability
to consume, and the appropriate of the product strategy, pricing strategy, product distribution
strategy. Some core contents include:
o Product and service appraisal: the project’s product, the market demand for that product, as
well as the supply level and capacity, etc. must be competently analyzed.
o Product positioning and customers’ taste: this helps build the product’s orientation and
distribution channel to enhance the project efficiency.
o Analysis of the potential market competition and competitive advantages of the product:
clearly define the product competitiveness in its market. What is the current product on the
market, how does it go compared with the project’s product? Thus leads to a conclusion of the
product’s competitive advantages in comparison with other existing products.
- Project’s financial appraisal
Financial analysis for a project is the process of comprehensively and thoroughly organizing, and
analyzing every aspects of the project, such as: legality, feasibility, effectiveness, and solvency of the
project, to come up with suitable decisions.
The commercial bank financial appraisal is the process in which the bank comprehensively and
thoroughly organizes, and analyzes every aspects of the project to make correct lending decisions.
The purpose of the financial appraisal is to objectively evaluate the financial feasibility of the

project, choosing good projects and simultaneously eliminating high-risk projects that are ineffective
and lack of the ability to repay. In addition, the project financial appraisal also assesses the project’s
level of risk for expertise to advise their client of possible solutions to ensure effective operation of
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the project and minimize the risk for the loan. On the basis of the evaluation results and the level of
risk, expertise can make decisions on the loan amount, term, interest rate, debt collection plan and
loan security measures.
Financial appraisal includes many interdependent factors. Some of the most important factors
are the following: (research and provide some of the content and method so financial appraisals used
by Vietnamese commercial banks)
o The appraisal of aggregate investment, investment structure and capital schedule:
The aggregate investment contains all the costs (initial production cost included) of the
project and is the highest amount of cost that is agreed in the investment contract. It is the value of
all the necessary assets for the project installment and operation; and is the needed capital for the
project.
The appraisal of aggregate investment is very important. It will reduce the possibility of
capital fluctuation in the project’s implementation process that can leads to capital imbalance, badly
influencing the project’s effectiveness and solvency. The basis to appraisal of aggregate investment
depends on the project scale, modernity of equipment, and the financing form. According to current
regulations, aggregate investment includes fixed capital, current capital, and capital reserve.
The appraisal of aggregate investment is not only simple calculations but also the assessment
of the reliability of provided data to recheck the required capital on the bank’s viewpoint.
After estimating the aggregate investment, equity investment, and other sources of fund, as
well as the financial health of the firm, the bank will address the real capital need for the project:
Loan = Aggregate investment – Equity investment – others
The reappraisal of the bank will ensure the lending process to be exact, suitable, and timely,
reducing the possibility of capital imbalance that can lead to capital shortage, misstating the project’s

financial effectiveness, or inefficient use of capital. The aggregate investment must be considered
during each stage of the project. To the bank, it is the base to address suitable capital progress, thus
actively manage its capital. Besides, the bank is also able to monitor and analyze its invested capital.
The sources of fund for a project include equity investment, bank loan, and other sources.
Thus, when doing the capital structure appraisal for a project, the commercial bank must analyze the
reality, availability and feasibility of each of these sources. For the equity capital, the bank needs to
address the ability to use current capital or equity-invested assets, their liquidity and market value to
determine the equity amount of the project. For the other sources of fund, the bank needs to consider
each loan contract, or third-party agreement for the project.
It is very important to consider the feasibility of each source of fund for the project because
this has a large impact on the solvency of the project.
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Capital shortage, capital imbalance or time lag could make a financial-sound project very
risky and harm its solvency. Thus, the bank should closely monitor and analyze the project
implementation and capital needs for each stage to ensure the project’s timeline. This is also the base
to build the lending and collecting schedule.
Beside the initial capital, the project requires annual current incremental to ensure its
operation. Thus, an efficient project could be ineffective if the annual required current incremental is
inappropriately estimated.
o Cash flow appraisal:
Project cash flow is the difference between the cash inflow and outflow of the project.
Net project cash flow = cash inflow – cash out flow
Cash inflow contains operating revenues, cash inflow from financing, gain from fixed assets
sale, and cash recollect from current incremental.
Cash outflow contains investment costs, annual operating costs, and implementing cost.
Most of the firms borrow money to do their businesses. Thus the project cash flow is the
operating cash flow. The cash flow is calculated as:

Operating cash flow = (After tax net profit) + Depreciation + Interest – Initial cash outlay
Normally, project cash flow is negative in the early years of the project when the cash
outlays are delivered but the profit from product and service revenue is still not enough. After a
period of time, when the product has been popular to customers, cash inflow will exceed cash
outflow and the net cash flow will be positive. Thus, the project cash flow has the tendency to rise in
the following years of the project.
Financial appraisal, theoretically speaking, is easy to conduct; but, as the matter of fact, it is
not simple. The project revenue in the following years depends on many factors such as economic
growth, price level, customers’ taste, rival competition. Estimation errors from actual cash flows will
lead to mistakes in financial analysis, and a wrong investment decision as the result. Therefore, to
enhance the quality of the financial appraisal for investment projects, appraiser should not only
calculate financial measurements but also analyze market, technical factors which influence the
project’s cash flow.
o Discount rate appraisal:
Discount rate is the required rate of return that investors require for the project. It is also used
to discount the project’s cash flows in calculating present value. If the project is funded using
multiple sources of fund, the discount rate is the weighted average cost of capital (WACC):
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
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W
rack
=
∑
=
m
t
ft
0

x r
at
Ft: weight of the capital source t in the total investment.
R: cost of the capital t.
M: number of sources of fund.
o Project financial measurement appraisal:
It is important to consider many aspects before making an investment decision. There are
many criteria to determine the economic benefit of a project. Normally, these following
measurements will be used to assess a project’s financial effectiveness:
 Net present value (NPV):
The project’s net present value is the difference between the present value of the cash flows
from the project and the present value of the investment, and is calculated as:
NPV =
∑
=
n
t 0
t
r
CtBt
)1(
)(
+
−
BT: project income in year t
Ct: project costs in year t (financing, operating costs, and corporate tax)
N: life of the project
R: discount rate
The project is accepted when the project’s NPV ≥ 0, the total project’s income exceeds the
total project’s costs after discounting back to present. The higher the project’s NPV, the more

financial attractive the project is.
The project is rejected when the NPV < 0, the total project’s income cannot cover its costs.
In the case of NPV ≥ 0, projects should be independent, which means they serve different
tasks, and the choice of a project does not affect the others; then they should all be accepted. In the
case of mutually exclusive, the project with the highest NPV will be accepted.
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The net present value shows the increase in value of the investment, regarding the time value
of money. It gives a better look at the investment; make the investment decision align with the profit
maximization goal of the firm. However, the net present value cannot tell the profitability of the
project and the relationship between the project’s profit and costs.
NPV reflects the net profit of the project, which has already been discounted back to present,
during its life. For the bank, the consideration is the ability to timely collect the interest and principal
of the loan, not the gross cash flow during the project’s life. Thus, NPV is only the first step to
analyze the project effectiveness, not a determinant factor to the lending decision. Many small NPV
projects are still accepted because the investor has the ability to repay his loan.

The internal rate of return (IRR):
The internal rate of return is the discount rate that makes the present value of future profit
from the project equal the present value of its costs. Thus, the internal rate of return is also a
discount rate that will make the net present value of the project equals zero.
Normally, the internal rate of return is calculated using the linear interpolation method or
trial and error. These methods currently are unpopular due to their complexity, time consummation,
and lack of accuracy. Calculating the IRR by excel spreadsheet reduce the calculating time and
errors.
This measurement reflects the rate of return that the project can obtain. Thus, it can be used
to analyze the project by comparing with the discount rate or the interest rate of the bank. If the
IRR< the cost of capital, the project is rejected. If the IRR = the cost of capital, the investor can

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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
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2013
choose to accept or reject the project based on the current situation. If the IRR> the cost of capital, in
the case of independent projects, all of them can be accepted. If the projects are mutually exclusive,
the IRR cannot be used directly to rank projects because the project with higher IRR is not
necessarily the more effective one.
This measurement shows the project’s profit in comparison with the cost of capital, the
relationship between the funding methods and the efficiency of the capital used of the project. This
method also informs us the highest cost of capital that the project can bare. Yet, the IRR method
does not mention the project size and use an unreal assumption of the reinvestment rate thus
investors can easily leave out highly profitable projects low profitability rate.

Profit index (PI):
The profit index shows the income from each dollar invested, thus, the project is accepted
only if its PI ≥ 1. It is a profitability benchmark that takes into account the time value of money. PI is
calculated as the present value of all the incomes from the project divided by the present value of the
invested capital. This ratio is as follow:
PI =
K
OCB
PV
PVPV −
=
( )
( )
( )
∑
∑

+
+
−
t
i
t
tt
r
K
r
OCB
1
1
PV
B
: present value of the incomes including yearly income of the project during its life.
PV
OC
: present value of the costs
B
T
: project income in year t
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
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2013
Co: operating costs.
( )
t
i

t
K
+1
: Present value of the invested capital.
R: discount rate
The PI reflects the relationship between the project incomes and the project invested capital.
The bank can use this measurement with projects that are different in size to rank projects’
profitability. However, the PI does not reflect the gross profit of each project; thus, it can lead to
misleading conclusions. It means that the PI should be used together with other measurements to
have a better overall conclusion.
 The payback period (Top):
The payback period is the period required for the project to create cash inflows that equal to
the project invested capital. It is the time to payback the initial outlay by the yearly income and
depreciation. If the yearly income and depreciation is stable, the payback period is calculated as:
T =
DP
K
+
T: the payback period
K: initial outlay
P: yearly profit
D: yearly depreciation
If the yearly income and depreciation is fluctuated, we calculate Top by subtracting the
yearly income and depreciation from the initial outlay until we get zero. When the remaining outlay
is smaller than the next year income, we calculate the ratio of the remaining outlay over the monthly
income of the next year to come up with the number of months required to collect the remaining
outlay.
Top is very important for the bank to determine the repayment period. This is an essential
element to consider beside the investment period; and it must be suitable with the project’s cash
flow. Projects with smaller Top will be preferred because the reinvestment process comes quicker.

Another thing is that smaller Top will reduce the risk of business failure, especially in the time of
high competition. In fact, banks often set the repayment period equal to the payback period to ensure
customers’ ability to repay the loan, and also reduce the risk that customers use their capital to
reinvest if the repayment period is longer than the payback period.
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
 Return on investment:
Return on investment is the relationship between the yearly average profits of the project
during the life of the project and the initial investment.
The yearly average profit of the project during its life is the arithmetic average of the profits
from the beginning until the end of the project.
Among projects, the project with higher return on investment is the better one. This
measurement is simple but does not take into account the difference in the time to recognize the
future profit of each project.
 Benefit – cost ratio (BCR):
The benefit-cost ratio is the ratio between the benefit and the cost of a project. These data
could be at the present value or future value. Normally, the CBR is calculated as:
BCR =
∑
∑
=
=
+
×
+
×
n
t

t
n
t
t
r
Ct
r
Bt
1
1
)1(
1
)1(
1
=
)(
)(
CPV
BPV
B
T
: project’s income in year t
C
t
: project’s cost in year t
R: discount rate
PV (B): present value of the project’s incomes
PV(C): present value of the project’s costs
The project is accepted if B\C ≥ 1. It means the total income of the project exceeds its total
cost, and the project is likely to be profitable.

The B\C is used as a benchmark to rank independent projects. In the case of mutually
exclusive projects, we cannot use the B\C.
o Risk appraisal:
Risk is uncertainty; it is the difference between the expected value and the actual value. The
project’s risk can be seen as the difference between the actual profit and the expected profit. There
are always potential risks and they can largely affect the project effectiveness.
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
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2013
The average life of a project is from 10 to 50 years. Projects are created and analyzed based
on their operations and future profits. In the market economy, data are always changing, especially
future data. Thus, risk cannot be eliminated. In the above analysis, factors such as revenue or costs
only take one value. The uncertainty and risk of a project exist when at any point of time during the
project life; there is more than one potential outcome. Therefore, we need to consider all the
outcomes that might happen to come up with solutions to prevent and mitigate risk, ensure the
project’s recoverability and profitability. Especially for the bank, as the lender, undesired outcomes
can have negative impacts on the project’s solvency and lead to investment loss. Thus, risk analysis
is very essential in the project appraisal process. The assessment of risk is also very important
information for making investment decision.
To assess the risk of a project, commercial banks often use these methods:
 Sensitivity analysis:
The project effectiveness depends much on the estimations of factors in that project. These
estimates cannot be exact especially due to future uncertainty. Thus when doing project appraisal,
we need to assess the stability of the measurements when input and output factors change. In other
words, we need to assess the sensitivity of the project to those changing factors.
In the sensitivity analysis, there often are some different situations, future risks increase
material costs, labor costs, reduce future revenues, etc. Then a new set of measurement is calculated
using the new values (NVP, IRR, PI, etc.). If the new results are still qualified, the project is
considered stable and is accepted. If not, the project is considered unstable and must be reconsidered

before any investment action takes place.
The sensitivity analysis shows us which factors should be closely monitored and regularly
checked to prevent and mitigate potential risks to the project. However this method still has some
limits, such as does not take into account the possibility of outcomes, the relationship between
variables and the change in their values in constant percentage is not always linked to the variability
of the observed effective variable.
 Scenario analysis
Although sensitivity analysis is very popular, it contains many limits as presented above.
Thus, scenario analysis is also used in project risk appraisal. This method combines the possibility of
risk variables and the impact of those variables onto the project. This analysis requires a collection
of good and bad outcomes to compare with the basic values. However, this method still has some
limits such as cannot identify all the possible combinations of the variables and only analyze some
concrete events, in fact there are numerous possible combinations among variables.
 Monte Carlo analysis
This method accounts for the possibility and correlation and recognizes potential impacts of
an event onto the project. It can also account for any delay or other events that can influence the
project. The most important thing is that it helps evaluate the present value of the project, distribute
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
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2013
the possibility of outcomes and failures. By ranking events due to their impacts on the project result
and their possibilities, the Monte Carlo analysis helps the financial analyst enhance their project
appraisal and identify potential risks of the project. Nowadays, with the technology progress in the
booking system, Monte Carlo analysis is very useful in the form of spreadsheets, become a favorite
tool of many modern banks on the world.
1.2. Quality of credit appraisal of commercial banks:
1.2.1. Quality of credit appraisal in general
In general, the evaluation of a project is considered to be good if it achieves the Bank’s
evaluation objectives as well as satisfies businesses’ demands.

The goal of credit appraisal of commercial banks is to get an exact and objective conclusion
about the feasibility of the project, making a base for the lending decision, preventing potential risks
for the bank; and also not leaving out profitable projects that can benefit the bank. Project appraisal,
especially financial appraisal is considered effective when the result helps the bank make suitable
lending decision, lending amount, lending period, and interest rate, etc. In contrast, the appraisal
quality is bad if the result leads to wrong decisions such as investing in ineffective projects, loss,
hard to collect principal, or rejecting profitable projects that harms the bank profitability, losing
relationship with firms, and damaging the bank reputation.
Firms, otherwise, evaluate the quality of project appraisal by time and the utilities that they
can get. Time should be long enough for the bank to give accurate appraisal result but short enough
for the firm to catch their investment opportunities. The simple and comfortable appraisal procedures
that do not disturb the firm are also a criterion. The utilities that the appraisal process can bring to
firms are advices such as whether to invest or not, what the suitable investment scale is, etc. The
bank’s advices to firms will be useful because of its expertise and experience in the financial field. It
can help firms prevent and mitigate potential risks as well as catch the best investment opportunities.
We can generally understand from the analysis above that “the quality of credit appraisal
shows the accuracy, objectivity, rationality, and flexibility level in evaluating the investment
project”.
1.2.2. Factors that influences the quality of credit appraisal
Quality of projects appraisal is influenced by both subjective and objective factors, which
need researching and evaluating their influences in order to improve the quality of projects appraisal.
Subjective factors
These are the internal factors of the Bank, the influence of these factors on the quality of
project appraisal is decisive because the bank will do its project appraisal and its results directly
affect the lending decisions.
o Appraisal operation
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
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2013

The appraisal is operated under multiple processes and the coordination of many people
from different departments. Therefore, to achieve high efficiency, strict management, and division of
responsibilities to each department colliding with ability and qualification, and close monitoring
need to be ensured.
o Appraisal staff
Investment project appraisal is actually a comprehensive assessment of economic, social,
financial aspects of the project to estimate the efficiency after being brought to life. Therefore, the
result is mostly affected by the people who appraise it, based on two aspects:
 Personal qualification: The project appraisal in general and of the financial aspect in
particular requires a careful all over consideration. One-sided conclusions from an unqualified
appraiser could lead to wrong decisions in lending operations of the Bank.
 Morality: is always the primary concern of the bank’s leaders. Bad attitude can distort
information, falsify results in the evaluation process or mislead the initial results which all lead to
the wrong decision in lending activity of the Bank.
o Material and technical basis
Along with the increasing development of powerful technology, investment projects are
getting more complex and the risks involved in investment activities are harder to predict. Thus up-
to-date technical facilities are a must. For example, the analysis of simulated situations cannot be
performed manually; it requires the assistance of computers with statistical mathematical software.
o Appraisal costs
The appraisal of commercial banks require additional costs to clarify items such as
evaluation of technology applied to the project, the actual investment of the project, etc. which are
usually beyond the understanding of the bank. It has negative impacts on the project quality and
misidentifies customers’ funding need. Therefore, the rising of evaluation cost will help the bank be
more accurate in determining the capital requirements of customers with the expertise it has.
The objective factors
o Quality of the investment project
Generally the appraisal relies on the project conducted by companies. In other words, the first
source of information used in the appraisal about technical, environmental, financial aspects is
provided by the companies in their carrying out projects. The bank conducts the appraisal based on

the reliability and objectivity of the information as well as the ability to set up a project of the
customer. If the projects are of high qualities with clear investment opportunities and a reliable basis,
the bank can conclude easily with high effectiveness. The complex project requires extensive and
newly updated knowledge of appraisers to assess comprehensively through all aspects. Thus the
more complex they are, the less accurate the conclusions might be.
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
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2013
o Investors’ elements:
The investor is a huge factor that directly affects the quality of project evaluation generally and
financial evaluation of the project particularly in two aspects: the honesty and the project executive
management level.
In many cases, the success or failure of the project is not due to market or technical factors but
the capacity of the enterprise management and execution. An unclear organizational structure or
unclear assignment of responsibilities will obviously affect the distribution of human resources,
labor cost and project management. Furthermore, incurred costs will make the financial performance
less effective and push the business into difficulties of repaying the bank.
The investor’s honesty deeply affects projects’ quality; and has direct impacts on the project
appraisal process. Besides, failing to report the financial situation of the firm also makes it difficult
for the bank to appraise the project.
o Market elements and the economic-social impact:
Market is always an important factor that affects a project’s measurements. Market variations of
the project’s inputs and outputs can easily cause estimations errors. For example, an unexpected
increase in input prices can turn a profitable project into a bad-looking one and extremely hurt its
solvency. Positive changes in the economy will directly affect the project schedule, and operation. A
possible project can easily be changed into impossible one in a dynamic economy.
o Government’s regulations and policies:
Changes in the government’s policies and regulations have direct impacts on projects. If the
appraiser cannot predict exactly these changes, he might incorrectly conclude about the project

financial effectiveness, leading to bad lending decisions for the bank.
CHAPTER 2: ACTUAL SITUATION OF CREDIT APPRAISAL FOR PROJECTS IN THE
FIELD OF PETROLEUM IN VIETINBANK
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
2.1. Some general information about Vietnam Joint stock commercial bank for Industry and
Trade - Hanoi branch
2.1.1. Introduction about Vietnam Joint stock commercial bank for Industry and Trade -
Hanoi branch
a. General introduction about Vietnam Joint stock commercial bank for Industry and Trade
Vietnam Joint stock Commercial bank for Industry and Tradewas established in 1988 is one
of the 5 largest commercial banks in Vietnam. On 15/04/2008 Industrial and Commercial Bank of
Vietnam are branded from Income Bank to the new brand as Vietinbank (named after the English
Industrialand Trade Bank of Vietnam, known asVietinbank).
Up to the present time, Industrial and Commercial Bank ofVietnam has grown into a network
of 01 exchange, 149 branches and over 900 transaction offices/savings in most provinces, cities,
shopping centers, commercial and industrial zones, export processing zones in the country.
b. General introduction about Hanoi branch
Formerly Exchange I, HN branch is the first branch and the largest of Vietinbank. In recent
years, Hanoi branch has invested in many large projects, insectors, key areas of the economy such as
the Vinasat project sponsored by Vietinbank, the network-expansion project of the Vietnam Post and
Telecommunications Group (VNPT), the grid development projects of the Vietnam Electricity
(EVN).
In 2012, the business operations of the branch is always growing, exceeding the assigned
targets. The branch was the especially outstanding unit in Vietinbank’s whole system.
2.1.2. Business operating results of Vietinbank and Hanoi branch
a. Business operating results of Vietinbank
In the recent years, the world economy is becoming more and more unstable, particularly

when the banking and financial crisis in the U.S spread to other countries in the world. Vietnam
economy’s growth rate remains modest. However, Vietinbank still manages to remain its stable and
sustainable growth. Credit operation of the bank is enhanced in terms of quality and is diversified to
best response to the clients’ demands.
In addition to traditional lending activities, Vietinbank increase operations in both
international and national interbank market to improve the efficiency of capital, contributing to
profit’s growth.
In order to better understand the operation of VietinBank in the past few years, we can
examine each service:
Borrowing activities:
25