LV thạc sỹ_Analysis of failures in implementing credit process at VIB

ACKNOWLEDGEMENT

Foremost, I would like to express my sincere gratitude to my supervisor Ph.D … for
the continuous support for my MBA graduation thesis, for his patience, motivation,
enthusiasm, and immense knowledge. His guidance helped me in all the time of
research and writing of this thesis. I would also like to thank to … who help me for
better understanding and implementation of Six sigma tools in the project.
Next, my sincere thanks also goes to National Economics University (NEU) –
Business School with its doctors, professors, teachers, coordinators together with
my classmates who have assisted me in my studying, conveying useful knowledge
and exchanging experiences via their lectures, case study and discussions.
I also would like to say thanks to my managers, colleagues at Vietnam International
Bank, Hanoi Head office and some branches in Hanoi for their support and sharing
materials, ideas and orientation, which help me much in collecting data and doing
thesis analysis.
Last but not the least, my deep gratitude goes to my family and friends who were
always supportive to me and encouraged me to fulfill the graduation thesis.
The author ….

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TABLE OF CONTENTS
ACKNOWLEDGEMENT......................................................................................1
ABBREVIATIONS..................................................................................................4
LIST OF TABLES...................................................................................................5
EXECUTIVE SUMMARY.....................................................................................7
INTRODUCTION...................................................................................................9
CHAPTER 1: THEORETICAL BACKGROUND ON TOOLS ANALYZING
FAILURE IN BANKING OPERATING.............................................................14
1.1. Major definitions of Six-sigma and Six-sigma tools.....................................14

1.1.1. Definition of Six-sigma...........................................................................14
1.1.2. DMAIC methodology.............................................................................15
1.1.3. Seven basic tools of quality control........................................................16
1.2. Operations at a commercial bank..................................................................20
1.2.1. Commercial banks..................................................................................20
1.2.2. Operations of commercial banks.............................................................21
1.3. Implementation of Six-sigma in analyzing failures of banking operation.....23
1.3.1. Using Six-sigma to improve quality in banking operation......................23
1.3.2. Using Six sigma tools for analyzing failures in operating management..26
1.3.3. Implementing “Cause and Effect diagram” in Banking..........................28
CHAPTER 2: ANALYSIS THE CURRENT STATUS OF CREDIT FAILURE
IN PROCESSING AT VIB....................................................................................32
2.1. Overview of credit activities at VIB..............................................................32
2.1.1. Introduction to VIB.................................................................................32
2.1.2. Credit activities at VIB..........................................................................34
2.1.3. VIB credit performance...........................................................................43
2.2. Analysis of failures of implementation credit process at VIB.......................46
2.2.1. Define.....................................................................................................46
2.2.2. Measure...................................................................................................48
2.2.3. Analysis...................................................................................................54

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CHAPTER 3: RECOMMENDATIONS TO PREVENT FAILURE IN
IMPLEMENTING CREDIT PROCESS AT VIB...............................................70
3.1. Orientation of VIB........................................................................................70
3.2. Recommendations to prevent failures in implementing credit process at VIB...71
3.2.1. The solution groups to improve the professional skill, and the work
handling skills...................................................................................................76

3.2.2. Solutions to reduce the pressure of work load.........................................78
3.2.3. The solution formulation of the policy reviewing work performance and
discipline to reward employees at VIB.............................................................79
3.2.4. Solution to manage the data and reports by software..............................80
3.2.5. Summarize the data of reports per six months........................................80
CONCLUSION......................................................................................................82
REFERENCES......................................................................................................83
APPENDIX 1: In-depth Interview Summary......................................................85
APPENDIX 2: Flowchart of credit process.......................................................87

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ABBREVIATIONS
BOD

Board of Directors

BOM

Board of Management

CBA

Commonwealth Bank of Australia

CEO

Chief Execute Officer

DMAIC

Define-Measure-Analysis-Improve-Control

NPLs

Non-performing loans

SBV

State Bank of Vietnam

SMEs

Small and Medium Enterprises

USD

United States Dollar

VIB

Vietnam International Bank

VND

Vietnam dong

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LIST OF TABLES
Table 1.1: Six-sigma processes in Credit and Financial management......................24
Table 2.1: Loan structure by duration and currency.................................................43
Table 2.2: Loan classification..................................................................................44
Table 2.3: Failures in implementing credit process at VIB......................................49
Table 2.4: Summary of the critical failures in credit operations in VIB,..................53
at June 30 2011........................................................................................................53
Table 2.5: Summary the critical failures in collateral security process at June 30
2011 in VIB.............................................................................................................55
Table 3.1: Summary of causes of failures and solution to the failures in credit
process..................................................................................................................... 72

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LIST OF CHARTS
Chart 1.1: DMAIC methodology.........................................................................16
Chart 1.2: Cause and Effect diagram...................................................................31
Chart 2.1: Flowchart of credit process at VIB (see at the page of 83).................40
Chart 2.2: The evolution of the group 2 debt, bad debts and overdue debts over
the years..............................................................................................................45
Chart 2.3: Fishbone diagram of cause groups for Failures in credit process at VIB.47
Chart 2.4: Fishbone diagram of possible causes for failures in credit process at VIB.52
Chart 2.5: Frequent of critical failures in credit operations in VIB, at June 30 2011.. 54
Chart 2.6: Pareto diagram of failures in collateral security process at June
2011 in VIB........................................................................................................56
Chart 2.7: Fishbone diagram of root causes lead to failures in credit process of
individual customer...............................................................................................58
Chart 2.8: Fishbone of root causes related to collateral failure in the individual

loan case.............................................................................................................. 60
Chart 2.9: Fishbone diagram of root cause of failures in credit process of firm
customer.............................................................................................................. 67

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EXECUTIVE SUMMARY
There is no doubt that the banking sector plays a significant role in the
economy of Vietnam. One of the most critical issues in banking management is
credit risk supervising, which refers to the mixture of credit growth and violations
monitoring in operation. Banks should choose and adjust their credit process and
regulations in order to maximize the value of the firm and ensure that their
operations develop stably and sustainably.
Established in 1996, Vietnam International Joint Stock Bank (VIB) has
continually grown and expanded its business. In order to increase outstanding of
loan and prevent failures in lending activities, the questions that BOM and BOD of
the bank greatly concern are: Which tools can used to analyze the failures in the
credit operation at the bank? What are failures and what are the root causes of
failures? And the solutions VIB should apply and how can the bank improve the
situation in its credit management? These questions encourage the author to do
study and write the thesis on the topic “Analysis of failures in implementing credit
process at Vietnam International Bank”.
To get materials for the thesis, both secondary and primary data are collected
in the period from 2008 up to June 2011. Sources of secondary data are from
published information from textbooks, articles, studies on magazines, websites;
information from VIB’s annual reports; reports from credit monitoring department,
loan restructuring department. For primary data, it is based on qualitative method,
particularly using in-depth interviews with one executive manager of the bank,
seven officers in different departments related risk credit monitoring, two customers

have loan of VIB.
The thesis starts with theoretical background on tool analyzing errors in
credit activities at banks, in which some related concept such as Six-sigma, DMAIC
methodology, tools of quality control (Cause and Effect diagram, Pareto diagram..)

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are clarified. On reviewing the literature, operations in a bank is also pointed out
such as: taking deposit, lending, securities and other services.
In the next section, the author briefly introduces about Vietnam International
Bank. Chapter 2 of the thesis also analyzes real situation of VIB’s credit
performance. Nevertheless, what should be paid more attention by VIB’s Board
management are the failures in its lending activities which includes: Failures relate
to collateral profiles, Failures relate to legal profiles, Failures relate to financial
profiles, Failures relate to loan profiles, Failures relate to Profile after
disbursement, Errors in drafting and document store stage, Do not implement
correctly credit procedures, and policies. And the author uses Six-sigma tools as
Cause and Effect diagram, Pareto diagram to analyze two loan cases and find causes
to those shortcomings as follow: The weak professional skill of officers in some
departments related credit risk monitoring, there is no sanction to punish these
failures, the business target and responsibility are too high while lack of staffs is
happening, the weakness of the loan data management.
The final part of the thesis, based on the VIB’s orientation to develop in the
next years, suggests some solutions to improve credit quality and decrease the
above failures in credit operation. The recommendations includes: reducing the
pressure of work load, formulating the policy reviewing work performance and
discipline to reward employees, managing data and reporting by software,
summarizing reports per six month and using some tools to analyze the report.

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INTRODUCTION

1. Rationale
Recent economic turmoil has put significant pressure on bank to cut cost and
decrease credit risk while maintaining a high level of customer satisfaction.
Vietnam International Commercial Joint Stock Bank, abbreviated as Vietnam
International Bank - VIB, same as other banks, from time to time VIB is now facing
with gradual and fierce competition from both domestic and foreign banks.
And credit activity is one of the most important programs that VIB’s Board
of management and Board of directors always put great attention.
However, affected by both objective and subjective causes, VIB has some problem
in their credit process recently as follows:
Number of overdue debts including group 2 and a significant increase in bad
debt over the year (bad debts doubled in 2010 compared to 2009, bad debts in June
- 2011 increased 1.5 times compared to 2010) demonstrated a certain stages in the
lending process errors.
Add to that the number of violations at VIB (especially concerning credit
violations of collateral) increases remarkably that capital losses are very high). The
violations occurred in almost all business units across the country, have a serious
nature, lasts a long time, pose a risk to the bank. However, statistics on the offense
of credit in reports stop at the individual statements and generalizations is not
adequate or not only cause deep, the roots of errors and so the violations continue to
occur many years.
So, for the purpose of the study is to analyze the root causes of the violations
in the process of lending at VIB from which useful solutions and practical to reduce
these errors, reduce credit risk for VIB, the author chose to research a thesis:
Analysis of failures in implementing credit process at VIB.

2. Research problem

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How managers at VIB can decrease essential failures in credit activities in order to
increase credit quality in the context of competition and government’s tightened
management regulations.
3. Research objective
The objectives of the research are:
- To review credit process at VIB
- To indentify errors in credit activities of VIB in some recent years and causes of
-

those errors
To suggest some recommendations to improve credit quality in credit at VIB
4. Research questions
This research is carried out in order to answer the following questions:
a. Tools used to analyze the errors in the operation at the bank?
b. Existing violations of the credit in the lending activities of VIB? The
cause of such violations?
c. Which solutions and recommendations for VIB to decrease credit
failures?
5. Research methodology

The research process is illustrated in the figure below:

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Identify research topic

Determine how to
conduct the research
Collect research data
Collect secondary data

Collect primary data
(indepth interviews)

Analyse and interpret
data
Recommendations

 Collecting secondary data
To gather information from published sources such as textbooks, articles,
studies on magazines, websites; banking industry data published by SBV;
information from VIB’s annual reports; reports from loan monitoring department.
The secondary data is used for:
Discuss concepts, general understanding of tools for analyzing errors in
-

operating
Make analysis of VIB’s performance results, and credit failures in particular
Use as references for making suggestions to improve credit activities at VIB.

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 Collecting primary data

To collect primary data, I used qualitative method. In particular, in-depth interviews
were carried out with the sample size of 13 people. Specific interviewees and information
was collected as in table below:

Interviewees

Information collected

- 2 customers have loans of VIB (one is a
company, another is an individual)
- 6 staffs relating approving loans of 2
above customers: 02 managers of 2
branches, 2 credit officers, 2 credit
administrative officers

- To define credit process that VIB is
applying, the errors in implementing
credit process and the causes of those
problems. From that recommendation

- 3 credit monitoring officers at Head office to improve this situation.
who review these loans.
- 1 loan restructuring team leader
Mr. Nguyen Dinh Truong Anh – The - Define the real situation that the
deputy director of Credit management bank have to find the root cause lower
Division

credit quality and the main factors
leading to instability in the credit
business

- Recommendations to divided credit
failures into seven basic groups at
VIB

 Analysis framework
Using Pareto and Cause and effect tools of Six sigma approach in operation
management to analyze the root cause of the observed failures in bank.
6. Research scope

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Due to the time and budget restriction and because departments responsible
for credit procedure mostly are located at VIB business units, this research is
planned to be executed at some branches in Hanoi.
In addition, there are many different and even opposite point of views on
bank’s optimal credit process. Up to now, there has not been any clear conclusion
about an optimal credit process applicable for all banks. Credit failure is not easy to
decrease or change in a short-time, it would be reduced in accordance with the
government’s regulations and the bank’s long-term strategy. Therefore, this research
will mainly focus on the essential errors in credit processing in order to find out root
causes of these errors. From that, showing solution that is concentrate to prevent
these mainly errors or decrease them at VIB. Additionally, there is not large number
of data for using many quality tools to analyzing, the “cause and effect diagram” is
considered as a main technique using in this thesis (following phases of DMAIC
methodology).
Secondary data is collected in the years of 2008 to June2011 and primary
data will be gathered from 2010 up to June 2011.
7. Research Structure
Apart from Introduction and Conclusion part, the content of this thesis consists of

three chapters as follows:
Chapter 1: Theoretical Background on tools analyzing failure in banking
operating
Chapter 2: Analysis the current status of credit failure in processing at VIB
Chapter 3: Recommendations to prevent failure in implementing credit process
at VIB

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CHAPTER 1: THEORETICAL BACKGROUND ON TOOLS
ANALYZING FAILURE IN BANKING OPERATING
1.1. Major definitions of Six-sigma and Six-sigma tools
1.1.1. Definition of Six-sigma
How can your organization thrive in increasingly competitive markets where
competitors simultaneously strive to improve market share, profits, cost, quality,
speed, flexibility, and customer service? Many corporations and organizations have
found six-sigma to be the management tool of choice in these fiercely competitive
global markets. As discussed here, six-sigma is much more comprehensive than
other quality management programs. It is not just a quality management program; it
is much more and therefore much more effective.
Since its initial development in 1985 at Motorola, the concepts and methods
of six-sigma have evolved and expanded within and across all industries. Despite its
popularity, confusion still remains at many firms about six-sigma, its potential
benefits and costs, and how it differs from other quality movements. Motorola’s
managers said that “Six-sigma is a proven tool set for driving and achieving
transformational change within an organization. It is a business improvement
process that focuses an organization on customer requirements, process alignment,
analytical rigor, and timely execution”.
According to Keller and Pyzdek (2009), Six-sigma is “a rigorous, focused,

and highly effective implementation of proven quality principles and techniques”.
Six-Sigma seeks to improve the quality of process outputs by identifying and
removing the causes of defects (errors) and minimizing variability in manufacturing
and business processes. It uses a set of quality management methods, including
statistical methods, and creates a special infrastructure of people within the
organization who are experts in these methods. Each Six Sigma project carried out

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within an organization follows a defined sequence of steps and has quantified
financial targets (cost reduction or profit increase).
Nowadays, Six-sigma is a strategic, top management driven transformation
of an organization that focuses on profitably fulfilling customer needs using highly
trained employees who use data in a disciplined and methodical scientific approach
to continuous improvement in competitiveness, processes, and products through
effective resource alignment. (DeLurgio and Hays, 2004).
Although there have many definitions of six-sigma but there is no doubt that
six-sigma is one of the most successful managerial approaches to apply in the credit
and financial management industry.
1.1.2. DMAIC methodology
The DMAIC is a basic component of Six Sigma approach, is a better way to
improve work process by eliminating the defects. The DMAIC methodology is used
for projects aimed at improving an existing business process. It has five phases
Define, Measure, Analysis, Improvement and Control (Russell & Taylor, 2009).


Define: In this phase, define the problem, the project goals and scope



Measure key aspects of the current process and collect relevant data.



Analyze the data to investigate and verify cause-and-effect relationships.
Determine what the relationships are, and attempt to ensure that all factors
have been considered. Seek out root cause of the defect under investigation.



Improve or optimize the current process based upon data analysis using
techniques such as design of experiments, mistake proofing, and standard
work to create a new, future state process. Set up pilot runs to establish
process capability.

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

Control the future state process to ensure that any deviations from target are
corrected before they result in defects. Implement control systems such as
statistical process control, production boards, and visual workplaces, and
continuously monitor the process.
Chart 1.1: DMAIC methodology
Define
Where is the
pain?

Control

Measure

How to ensure,
we never, ever
have the pain?

What is the
extent of the
pain?

Six-sigma
DMAIC

Improve
What is the
prescription to
remove the
pain?

Analyze
What are the
causes of the
pain?

Source: www.igneousesolution.net
1.1.3. Seven basic tools of quality control
The seven basic tools of quality is a designation given to a fixed set of
graphical techniques identified as being most helpful in troubleshooting issues

related to quality. They are called basic because they are suitable for people with

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little formal training in statistics and because they can be used to solve the vast
majority of quality-related issues. The tools are: Pareto charts, process flowcharts,
check sheets, histograms, scatter diagrams, statistical process control charts and
cause-and-effect diagrams.
Process flowcharts: A diagram of the steps in a process, job, operation. It
enables everyone involved in identifying and solving quality problems to have a
clear picture of how a specific operation works and a common frame of reference. It
also enables a process improvement team to understand the interrelationship of the
departments and functions that constitute a process. This helps focus on where
problem might occur and if the process itself needs fixing. Development of the
flowchart can help indentify quality problems by helping the problem solvers better
understand the process.
Check sheet: are frequently used in conjunction with histograms, as well as
with Pareto diagrams. A check sheet is a fact-finding tool used to collect data about
quality problems. A typical check sheet for quality defects tallies the number of
defects for a variety of previously identified problem causes. When the check sheet
is completed, the total tally of defects for each cause can be used to create a
histogram or a Pareto chart.
The check sheet is a simple document that is used for collecting data in real-time
and at the location where the data is generated. The document is typically a blank
form that is designed for the quick, easy, and efficient recording of the desired
information, which can be either quantitative or qualitative. When the information is
quantitative, the check sheet is sometimes called a tally sheet.
A defining characteristic of a check sheet is that data is recorded by making marks
("checks") on it. A typical check sheet is divided into regions, and marks made in

different regions have different significance. Data is read by observing the location
and number of marks on the sheet. 5 Basic types of Check Sheets:


Classification: A trait such as a defect or failure mode must be classified into
a category.

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

Location: The physical location of a trait is indicated on a picture of a part or
item being evaluated.



Frequency: The presence or absence of a trait or combination of traits is
indicated. Also number of occurrences of a trait on a part can be indicated.



Measurement Scale: A measurement scale is divided into intervals, and
measurements are indicated by checking an appropriate interval.



Check List: The items to be performed for a task are listed so that, as each is
accomplished
Histogram: A diagram showing the frequency of data related to a quality

problem.
In statistics, a histogram is a graphical representation, showing a visual impression
of the distribution of data. It is an estimate of the probability distribution of a
continuous variable. A histogram consists of tabular frequencies, shown as adjacent
rectangles, erected over discrete intervals (bins), with an area equal to the frequency
of the observations in the interval. The height of a rectangle is also equal to the
frequency density of the interval, i.e., the frequency divided by the width of the
interval. The total area of the histogram is equal to the number of data. A histogram
may also be normalized displaying relative frequencies. It then shows the
proportion of cases that fall into each of several categories, with the total area
equaling 1. The categories are usually specified as consecutive, non-overlapping
intervals of a variable. The categories (intervals) must be adjacent, and often are
chosen to be of the same size.
Histograms are used to plot density of data, and often for density estimation:
estimating the probability density function of the underlying variable. The total area
of a histogram used for probability density is always normalized to 1. If the length
of the intervals on the x-axis is all one, then a histogram is identical to a relative
frequency plot.

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An alternative to the histogram is kernel density estimation, which uses a kernel to
smooth samples. This will construct a smooth probability density function, which
will in general more accurately reflect the underlying variable.
Scatter diagram: Graphically show the relationship between two variables,
such as the brittleness of a piece of material and the temperature at which it is
baked. One temperature reading should result in a specific degree of brittleness
representing one point on the diagram. Many such points on the diagram visually

show a pattern between the two variables and a relationship or lack of one. This
diagram could be used to identifying a particular quality problem associated with
the baking process.
Statistical process control chart: A chart with statistical upper and lower
limits; if the process stays between these limits overtime, it is in control and a
problem does not exist.
The control chart is used to study how a process changes over time. Data are plotted
in time order. A control chart always has a central line for the average, an upper line
for the upper control limit and a lower line for the lower control limit. These lines
are determined from historical data. By comparing current data to these lines, you
can draw conclusions about whether the process variation is consistent (in control)
or is unpredictable (out of control, affected by special causes of variation).
Control charts for variable data are used in pairs. The top chart monitors the
average, or the centering of the distribution of data from the process. The bottom
chart monitors the range, or the width of the distribution. If your data were shots in
target practice, the average is where the shots are clustering, and the range is how
tightly they are clustered. Control charts for attribute data are used singly.
Pareto chart: is a type of chart that contains both bars and a line graph,
where individual values are represented in descending order by bars, and the
cumulative total is represented by the line.

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The purpose of the Pareto chart is to highlight the most important among a
(typically large) set of factors. In quality control, it often represents the most
common sources of defects, the highest occurring type of defect, or the most
frequent reasons for customer complaints, and so on.
Cause-and-effect diagrams (also called fishbone diagrams or Fishikawa) are
diagrams that show the causes of a certain event.

Common uses of the Cause-and-effect diagram are product design and quality
defect prevention, to identify potential factors causing an overall effect. Each cause
or reason for imperfection is a source of variation. Causes are usually grouped into
major categories to identify these sources of variation.
The “effect” box at the end of the diagram is the quality problem that needs
correction. A center line connects the effect box to the major categories of possible
problem causes, displayed as branches off of the center line. The box at the end of
each branch (or fishbone) describes the cause category. The diagram starts out in
this form with only the major categories at the end of each branch. Individual causes
associated with each category are attached as separate lines along the length of the
branch during the brainstorming process. Sometimes the causes are rank-ordered
along the branches in order to identify those that are most likely to affect the
problem. The cause-and effect diagram is a means for thinking through a problem
and recording the possible causes in an organized and easily interpretable manner.
1.2. Operations at a commercial bank
1.2.1. Commercial banks
The commercial banking sector plays an important role in
mobilization of deposits and disbursement of credit to various
sectors of the economy. A sound and efficient banking system
places foundation for maintaining financial stability. What is a
commercial bank?

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According to Peter S.Rose, “Banks are those financial
institutions that offer the widest range of financial servicesespecially credit, savings and payment services – and perform the
widest range of financial functions of any business firm in the
economy” (Rose, 2002, Commercial Bank Management, pp.8).
More specifically, Carl Wolf defined that “a commercial bank is a

financial intermediary which conduct overall banking activities
including deposit taking, lending business, bank-owned securities
and various banking services for its clientele” (Carl Wolf, 2010,
Role of Commercial Banks in Foreign Trade).
By the end of 2010, Vietnamese commercial banks system include 5 stateowned banks; 38 domestic private joint stock banks; 13 branches and sub-branches
of 100% foreign owned banks and 5 joint venture banks established with foreign
and Vietnamese capital.
1.2.2. Operations of commercial banks
Commercial banks are licensed to conduct banking operations within their
local communities. They are able to take deposits, make loans, own securities and
conduct banking services for their clients. Since commercial banks are profit-based
organizations that are privately owned, they must be effective in serving the
financial needs of their customers.
1.2.2.1.

Taking deposits

Commercial banks must obtain deposits from their client
base to maintain stable liquidity. The basic types of deposits
offered are checking, savings, money market and time deposits.
Banks use these funds to make loans, buy securities and keep
cash on hand. They may generate profit by utilizing deposits to
make loans or purchase bonds that provide a net spread in rates.

21


Because a bank's loaning capacity, and consequently its earning
power, depends largely upon its deposits, it is always striving for
more customers and larger deposits.

There are different ways to classify bank deposits, one of
which is dividing deposits into four types as follow: Time deposit
(or term deposit), Demand deposit, Saving account, Recurring
deposit (or accumulated deposit).
1.2.2.2.

Lending

Commercial banks generate various types of loans to consumers and
businesses. For the individual consumers, they offer auto loans, mortgage loans or
home equity lines of credit loans. On the other hand, business entities require startup loans, working capital loans and construction loans. These days, to meet
diversified demand of customers, banks create many new lending products such as
vacation/holiday loans, education loans, agriculture sponsored loans, etc. The
spread between loans and deposits creates profit for the bank.
The traditional approach to classify loans is split loans into
two types: secured loans and unsecured loans:
Secured loan are loans in which the borrower pledges some assets as
collateral for the loan. One typical example of this type is mortgage loan. This is a
very common type of debt instrument, used to purchase real estate. Under this
arrangement, the money is used to purchase the property. Commercial banks,
however, are given security - a lien on the title to the house - until the mortgage is
paid off in full. If the borrower defaults on the loan, the bank would have the legal
right to repossess the house and sell it, to recover sums owing to it.

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Unsecured loan are monetary loans that are not secured against the
borrowers assets (i.e., no collateral is involved). These may be available from
financial institutions under many different guises or marketing packages:



bank overdrafts



corporate bonds



credit card debt



credit facilities or lines of credit



personal loans

1.2.2.3.

Securities

Commercial banks keep a certain portion of their assets in government
backed securities such as treasury bills, notes and government-backed mortgage
bonds. This gives the bank diversity, stability and safety. Treasury securities are a
safe and secure investment option because the full faith and credit of the
government guarantees that interest and principal payments will be paid on time.
Also, most treasury securities are liquid, which means they can easily be sold for

cash. Banks also buys corporate bonds and international securities to earn interest.
The interest rate of securities is not very high but it yields the stable profit margin
for the banks’ development.
1.2.2.4. Services
Commercial banks offer a full range of products and services. They are able
to offer their customers an entire array of fee-based services, which include safe
deposit boxes, lock box service, issuance of cashier checks, money transfer, money
orders, check collection services, letters of credit and many other types of services.
Furthermore, banks that possess the proper licenses are able to offer trust services,
portfolio management and insurance. Each commercial bank must carefully analyze
the profitability of services offered that are not in demand.

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1.3.

Implementation of Six-sigma in analyzing failures of banking operation

1.3.1. Using Six-sigma to improve quality in banking operation
Six sigma is a process-focused and data driven methodology aimed at near
elimination of defects in all processes (for example: manufacturing, service and
transactional) which are critical to customers. As a powerful business strategy, Sixsigma has been around for almost 20 years and has grown exponentially in financial
services sector during the past seven years in the United States of America and
probably five years in the United Kingdom. The financial service companies which
have made significant impact to the bottom-line include Citibank, Bank of America,
HSBC, Credit Suisse, Royal Bank of Scotland, Barclays Bank to name but a few
here. (Antony, 2007).
Recently, there is a growing interest in six-sigma across all industries. In
1997 Citibank began applying six-sigma techniques to reduce defects in its banking

divisions while also reducing cycle times. A five step approach was used for
successful cycle time reduction:
-

Planning entailing identification of needed process improvements, identification
of team leaders and other employees to redesign the process (2-4 weeks)

-

“As is sessions” that map current processes identifying valueless activities and
disconnects (2-5 days)

-

Involving others in determining possible solutions (3-5 weeks)

-

“Should be” sessions to develop a model that works better and faster (3-5 days)

-

“Detailed design and implementation that creates teams and action plans (5-10
months)
Applying six-sigma techniques in the Asset-based finance division reduced

the cycle time on funds availability by 75%. The private banking division reduced
the need for customer call-backs on funds transfers on 73% of transactions. The

24

Global Equipment Finance Division reduced the credit decision cycle from three
days to one.
Moreover, there are several dozen applications of six-sigma in credit and
financial management. While there are many beneficial applications listed in Table
1, it is not complete; it does not include all potential benefits. Not shown in the table
are implicit benefits such as improved customer service, reduced lost profit,
improved employee morale and retention, enhanced organizational image, and other
implicit, but important benefits that may be hard to quantify.
Table 1.1: Six-sigma processes in Credit and Financial management
1
2
3
4
5

Improving collections efficiency
Reducing document retrieval times.
Reducing the number of “Past Dues”
Reducing in “lost interest”
Reducing average and variation in days outstanding of accounts

6
7
8
9
10
11
12

13
14

receivable
Optimizing timing of invoice payments in accounts payable
Managing costs of public accounting firms
Improving skip tracing in collections
Determining the best way to factor inventory
Determining the best way to factor accounts receivable
Closing the books faster
Improving the audit process to be more accurate and faster
Realizing revenue from long-term service agreements faster
Hedging foreign currencies-speeding up the manner in which we convert

15
16
17
18
19

foreign currencies
Reducing variation in cash flow
Improving credit scoring speed
Improving journal entry accuracy
Improving forecasting accuracy
Improving accuracy and reducing cycle time of standard financial

20

reports

Filing federal, state, and local taxes more quickly

25