LV Thạc sỹ_Enhancing the quality of medium and long term credit in agribank

NATIONAL ECONOMICS UNIVERSITY
FACULTY OF FOREIGN LANGUAGES
ENGLISH FOR BUSINESS DEPARTMENT

ENHANCING THE QUALITY OF MEDIUM AND LONGTERM CREDIT IN VIETNAM BANK FOR
AGRICULTURE AND RURAL DEVELOPMENT – HUU
LUNG BRANCH


NATIONAL ECONOMICS UNIVERSITY
FACULTY OF FOREIGN LANGUAGES
ENGLISH FOR BUSINESS DEPARTMENT

ENHANCING THE QUALITY OF MEDIUM AND LONGTERM CREDIT IN VIETNAM BANK FOR
AGRICULTURE AND RURAL DEVELOPMENT – HUU
LUNG BRANCH


ACKNOWLEGMENT
First of all, from bottom of my heart, I would like to send my most sincere
thanks to Ms…, Faculty of Foreign Language - Department of Business English National Economics University, who has supported me during my report writing
process. Without her whole – hearted instruction, I could not have accomplished
this report.
Secondly, I would also like to express my great attitude to Mr…, the director
of Agribank – Huu Lung branch and all staff in Credit Department, who
enthusiastically offered me with the very first ideas on research methods, precious
comments and encouragement during my internship process. I have learned a lot
from his precious knowledge about credits as well as his industriousness and big
dedication in work. Thanks to his great assistance, I have finished this report.
Additionally, I also want to show my deep gratitude to all teachers of the
Faculty of Foreign Languages, National Economics University for helping me to

cultivate background knowledge of some subjects related to my research such as
English for Banking and Finance, English for Management.
Finally, I do want to give the last grateful sentence to my family and friends
who always stand by me and continuously encourage me during four years in
National Economics University. They are really the greatest spiritual motivation for
me to make my best efforts to perfect myself and overcome the most difficult time
as a student.
Because of limited experience and lack of time, the report might have many
shortcomings. I am looking forward to receiving any comments to make my report
better.


TABLE OF CONTENTS
LIST OF ABBREVIATIONS.......................................................................................i
LIST OF FIGURES.....................................................................................................ii
LIST OF TABLES.......................................................................................................ii
EXECUTIVE SUMMARY........................................................................................iii
INTRODUCTION.......................................................................................................1
1. Introduction of the research topic.......................................................................1
2. Rationales.............................................................................................................. 1
3. Research questions...............................................................................................2
4. Scope of the research............................................................................................2
5. Methodology.........................................................................................................2
CHAPTER I: INTRODUCTION...............................................................................4
1.1 Introduction of Agribank – Huu Lung branch.................................................4
1.1.1 History of establishment and development...................................................4
1.1.2 Organizational structure...............................................................................5
1.1.3 Functions and missions................................................................................7
1.1.4 Several business results................................................................................8
1.2 The key term definitions....................................................................................9

1.2.1 Credit............................................................................................................. 9
1.2.2 Outstanding loan..........................................................................................9
1.2.3 Overdue debts................................................................................................9
1.2.4 Bad debt......................................................................................................10
CHAPTER II: THEORETICAL FRAMEWORK..................................................11
2.1 Overview of medium and long-term credit.....................................................11
2.1.1 Definition of medium and long-term credit................................................11
2.1.2 The role of medium and long-term credit in the market economy............11
2.1.2.1 With respect to the economy..................................................................11
2.1.2.2 With respect to enterprises....................................................................12
2.1.2.3 With respect to banks............................................................................13
2.2 Criteria to assess the quality of medium and long-term credit.....................13
2.2.1 Overdue debt ratio.......................................................................................13
2.2.2 Income from credits....................................................................................14
2.2.3 Credit capital turnover................................................................................14


2.3 Factors affecting to the quality of medium and long-term credit.................15
2.3.1 Factors from banks.....................................................................................15
2.3.1.1 Lending strategy...................................................................................15
2.3.1.2 The capability of the capital source......................................................15
2.3.1.3 Lending procedure................................................................................16
2.3.1.4 The quality of human resource..............................................................16
2.3.2 Factors from customers..............................................................................17
2.3.2.1 Customers’ capacity..............................................................................17
2.3.2.2 Customers’ reputation...........................................................................17
2.3.2.3 Customers’ asset ownership..................................................................18
2.3.3 Other objective factors................................................................................18
2.3.3.1 Economic environment..........................................................................18
2.3.3.2 Legal environment................................................................................18

2.3.3.3 Policies from Government....................................................................19
CHAPTER III: ANALYSIS AND FINDINGS.........................................................20
3.1. Credit-worthiness and credit risk management in Agribank – Huu Lung
branch.....................................................................................................................20
3.1.1. Loans situation..........................................................................................20
3.1.2. Structure of outstanding loans..................................................................21
3.1.3. Term loans based on type of business........................................................24
3.1.4. Term loans based on economic sector.......................................................25
3.1.5. Bad loans...................................................................................................26
3.2. Assessment of medium and long-term credit quality in Agribank - Huu
Lung branch............................................................................................................ 26
3.2.1. Achievements.............................................................................................26
3.2.2. Limitations.................................................................................................27
3.2.3. Causes........................................................................................................28
3.2.3.1. Subjective causes.................................................................................28
3.2.3.2. Objective causes..................................................................................29
CHAPTER IV: RECOMMENDATIONS................................................................31
4.1 Orientation of Agribank - Huu Lung branch to enhance the quality of
medium and long-term credit in the next periods................................................31
4.1.1 Business plan in 2013 of Agribank – Huu Lung branch...........................31
4.1.2 Orientation for developing medium and long-term credit activities..........32


4.2 Recommendations to enhance the quality of medium and long-term
credit at Agribank - Huu Lung branch.................................................................32
4.2.1 Strengthening capital mobilization and researches on the capital
source with low cost.............................................................................................33
4.2.2 Advancing the quality of project assessment and the management of
lending process....................................................................................................33
4.2.3 Enhancing the inspecting process before, during and after lending.........34

4.2.4 Improving the quality of human resource..................................................35
4.2.5 Expanding marketing activities..................................................................36
4.2.6 Developing customer consulting centers....................................................36
4.2.7 Simplifying lending procedures..................................................................37
4.2.8 Supporting solutions from customers.........................................................37
4.3 Proposals to enhance the quality of medium and long-term credit at
Agribank - Huu Lung branch................................................................................38
4.3.1 Proposals to the State..................................................................................38
4.3.2 Proposals to the State Bank........................................................................38
4.3.3 Proposals to Agribank.................................................................................39
CONCLUSION..........................................................................................................40
APPENDIX
REFERENCES


LIST OF ABBREVIATIONS

Agribank - Huu Lung branch

Vietnam Bank for Agriculture and Rural
Development - Huu Lung branch

SMEs

Small and Medium Enterprises

VND

Vietnam dong

i


LIST OF FIGURES
Figure 1: Organizational structure of Agribank – Huu Lung branch.....................5
Figure 2: The outstanding loans based on repayment time (2010 – 2012).............23

LIST OF TABLES
Table 1: Functions of each level in the organizational structure..............................6
Table 2: Loans situation (2010 – 2012).....................................................................20
Table 3: Ratio of total outstanding loans per total mobilized capital (2010 – 2012)
..................................................................................................................................... 21
Table 5: Medium and long-term loans based on type of business (2010 – 2012)
..................................................................................................................................... 24

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EXECUTIVE SUMMARY
Nowadays, Viet Nam has been developing the mechanism of socialistoriented market economy, which has been controlled by the clear-sighted leadership
of the Vietnamese Party and State, and also has undergone the process of
“Industrialization and Modernization”, which targets at the increase in people’s
property, the nation’s strength, the society’s fairness, democratization, and
civilization. In facts, whether a country’s economy and society is strong and healthy
or not, is much dependent on the effectiveness of banking and finance activities.
Therefore, to respond to the State’s the process, as well as reach these above targets,
it is required that credit officers in banks need accomplish their roles in making
right decisions to lend enterprises or households in order to obtain the highest
profits, minimize the credit risks, and keep the capital source in safety also.
In Agribank – Huu Lung branch, credit activities play a key part in not only

the existence and development of the branch but also the growth of its district and
our country in general. During the “Industrialization and Modernization” process,
like other organizations throughout the country, enterprises in Huu Lung district
also have been increasing the facility development, the technique renovation, and
the technique equipment improvement. This certainly asks for a great amount of
medium and long-term capital, which can be well-supported by banks, specifically
by the credit capital source from banks. However, the problem here is how to make
use of most of the medium and long-term capital’s positive aspects and to avoid
wastefulness in enterprises’ and households’ business also. In reality, it is not denied
that the more the quality of medium and long term credit is expanded and improved,
the more the medium and long term capital only can improve its positive roles.
However, the ceaseless changes of the market economy make it impossible to
predict all potential risks and their influences on credit in general and medium and
long-term credit of the whole banking system as well as of Agribank – Huu Lung
Branch in particular. It is the reason that urges me to choose the topic: “Enhancing
the quality of medium and long-term credit in Agribank – Huu Lung branch”
to do a research.
The purpose of this report is to analyze the current situation of the medium
and long term credit activity in Agribank – Huu Lung branch from 2010 to 2012
and then propose some solutions to enhance the quality of these kinds of credit.
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Data was mainly extracted and calculated from its business department’s financial
document and some other internal papers.
This dissertation is divided into four main chapters:
Chapter 1: Introduction. This chapter presents a brief overview of Agribank –
Huu Lung branch’s establishment, organizational structure, missions and some
business results in particular.
Chapter 2: Theoretical framework. This chapter will provide readers with the

essential background knowledge of the banking credit and especially the medium
and long-term credit.
Chapter 3: Analysis and findings. In this chapter, the author analyzes and
evaluates the current situation about the quality of medium and long-term credit in
Agribank – Huu Lung branch within 3 years. At the same time, the obtained results,
limitations and causes will be drawn out.
Chapter 4: Recommendations. The final chapter is supposed to give some
recommendations to improve the effectiveness of the medium and long-term credit
in Agribank – Huu Lung branch.
As a result, Agribank – Huu Lung branch should continuously pay much
attention to improving the quality of credit, especially the quality of medium and
long term credit so that the branch can gain the best outcomes contributing to the
statement of its certain position in the whole banking system and actually making
great contribution to the society’s development.

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INTRODUCTION
1. Introduction of the research topic
At the dawn of the 21st century, the rapid growth of globalization and
internationalization have been broadening, deepening and speeding up world-wide
interconnectedness in all aspects of the world economy. To fit well with the
situation, Vietnam has developed an open market-oriented economy which puts a
high premium on co-operation and integration. In that context, all organizations and
enterprises have responded the State’s this policy by intensifying the facility
development, the technique renovation, and the technique equipment improvement.
That requires finance organizations, especially commercial banks to take actions to
support these enterprises to accomplish their renovation and then make positive
influences on the success of the State’s the policy. Actually, to fulfill this mission, it

is necessary for banks to focus on improving the credit’s quality.
There are three kinds of credit: short-term credit, medium-term credit and
long-term credit. Based on theories learned and real situation of the society, I decide
to carry out a research on the ways to enhance the quality of medium and long-term
credit of Agribank – Huu Lung branch.
2. Rationales
Agribank – Huu Lung branch was set up in 1998. Acknowledging the urgent
requirement of the new economic context, the branch has made a strong
concentration on its credit activities, especially the medium and long-term credit
services in order to well support enterprises and other organizations to complete the
industrialization and modernization process successfully. So far, Agribank – Huu
Lung branch’s business always plays a leading part amongst banks belonging to
Agribank – Lang Son province branch in developing the growth of the whole
Agribank system. However, due to the tough economic situation as well as the
complexity of the credit activity, the branch’s the lending activities cannot avoid
unexpected credit risks and other limitations.
During a short-term internship in Agribank – Huu Lung branch, the author
has obtained a lot of valuable knowledge and practical experience. Being full aware
of the importance of the medium and long-term credit toward the development in
the branch’s business, with the aims of studying the current situation regarding the
effectiveness of the medium and long-term credit in Vietnam Agribank in general

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and Agribank – Huu Lung branch in particular, and then find out some solutions to
increase the quality of the medium and long-term lending activity, the author
decided to choose the following topic for this research paper: “Enhancing the
quality of medium and long-term credit in Agribank – Huu Lung branch”.
3. Research questions

This report was designed to analyze the real situation of the medium and
long-term credit service in Agribank – Huu Lung branch. To be more specific, the
study seeks answers to these following questions:
a. Which criteria should be chosen to assess the quality of the medium and
long-term credit activity?
b. Which factors have influence on the quality of the medium and long-term
credit activity?
c. How effectively did Agribank – Huu Lung branch perform its medium
and long-term credit activities during the period between 2010 and 2012?
And what are the reasons behind some existing shortcomings?
d. What can be the recommendations for Agribank – Huu Lung branch to
perfect its credit service?
4. Scope of the research
The research paper will cover the following contents:
 Determining the criteria to assess the quality of the medium and long-term
credit activity.
 Identifying factors affecting the quality of the medium and long-term credit
activity.
 Describing and analyzing the real situation of the medium and long-term
credit activities in Agribank – Huu Lung branch within three years (from
2010 to 2012).
 Suggesting some solutions to improve the quality of the medium and longterm credit service.
5. Methodology
a. Materials
The materials used in this report were collected from different sources. Data
mainly came from Agribank – Huu Lung branch’s internal documents and statistics.
Theories were extracted from some printed textbooks on international payments as

2

well as other reference sources. Furthermore, the author also consulted articles,
journals and online resources to gather practical information for the report.
b. Designs
About the types of the research, descriptive research design and casual
research design are united to assess the quality of the medium and long-term credit
service in Agribank – Huu Lung branch.
At first, the author uses the descriptive method of research to illustrate the
outstanding features in the current situation of the medium and long-term credit
service in Agribank – Huu Lung branch.
Secondly, the author applies casual research method to analyze the reasons
for some existing limitations of the medium and long-term credit service in
Agribank – Huu Lung branch.
With the combination of these two methods, the author can obtain a deep
understanding about the topic as well as cultivate the own knowledge of the
medium and long-term credit service.

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CHAPTER I: INTRODUCTION
1.1 Introduction of Agribank – Huu Lung branch
1.1.1 History of establishment and development
Agribank – Huu Lung branch that has been belonged to Agribank – Lang
Son province branch and also a member of Agribank Viet Nam has started its
business up since October, 1998.
It can be seen that, this period of the bank’s establishment is a sensitive point
of the national economy in which all enterprises had to deal with consequences of
wars as well as respond the Party’s renovation policy. Additionally, there were a lot
of social problems after wars emerging which increasingly caused higgledypiggledy situation in all aspects.

At the beginning, the Bank faced up with a lot of difficulties including
blocked business activities of local enterprises and co-operatives, stagnating
production activities, slow cash flow, imbalance between revenues and
expenditures, cumbersome organizational structure. Moreover, small capital
resource and high ratio of overdue outstanding loans were also troubles that it
confronted at the starting point.
In term of organizational system and human resource, the large number of
staff along with the small percentage of skilled workers was issues that were
prioritized to be solved at first. In detailed, the Bank had to cut the number of
officers down by 42.8 %, equivalent to 30 people (from 70 down to 40 people).
With respect to capital resource, it was required that the Banks had to change
its investment strategy and capital mobilization policy in order to run its business
and keep itself alive in the market. Specifically, Agribank – Huu Lung branch had to
actively widen its business scale following the rule “borrowing to lending” and
publish some marketing strategies to appeal customers to send their money to the
bank so as to enlarge capital scale. As results, capital mobilization has had positive
impacts on capital scale, specifically increasing from only hundreds of million VND
to 160 billion of VND. Because 95% customers of the bank were households and
small business points, Agribank – Huu Lung branch had a lot of troubles in
developing its business and Commercial Bank in general as well. By June 1999, the
branch has made balance between revenues and expenditures and from then on, its
income more and more has increased, thus it can guarantee salary delivery for staff

4


on time with suitable levels following Vietnam Bank for Agriculture and Rural
Development’s rules.
1.1.2 Organizational structure
Now, the branch consists of 50 staff, in which there are 49 regular members

and 1 contract worker. The organizational structure is rather simple but the
allocation staff into each position is still so appropriate as follows:
Figure 1: Organizational structure of Agribank – Huu Lung branch
DIRECTOR
Sale Department

Vice-Directors

Accounting Department
Checking-up and
Internal Auditing
Department
Administration and
Human Resource
Department

Transaction rooms

(Source: Agribank – Huu Lung Branch Operations Centre)

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In spite of the small number of staff and the simple organizational system,
each position is still given specific assignments in order to keep the branch run
smoothly as well as gain high profit in its business.
Table 1: Functions of each level in the organizational structure
FUNCTIONS
Actively set up business programs and plans, and operate
business activities under the control of industry, Agribank – Lang

Director
Son city branch and the local authority’s regulations.
Timely announce social welfares, circulars, instructions,
and decrees, to officers in the branch and check-up the obedience
of these legal documents.
Regularly take care of staff’s living condition, open
Vice-Directors
training courses in order to improve their skills and qualifications
in the branch.
Build customer service strategies, propose sale policies,
and gradually broaden credit relationship with local customers
including enterprises and households.
Receive, evaluate, and run lending projects and programs
of enterprises under regulations of State Bank as well as the
Sale
superior Agribank.
Department
Frequently check-up and analyze borrowers, classify
loans, etc to prepare effective solutions to recover loans.
Make periodical sale reports or reports following
managers’ directions.
Fulfill other functions when assigned.
Accounting
Establish service transactions with customers including
Department
paying savings, collecting cash flows and ensuring customer
profile’s security.
Check-up and supervise the obedience of social welfares,
accounting regulations and procedures following the control of
the banking industry and the State.

Strictly comply with regulations on budgets and general
accounting operations in order to detect and revoke counterfeit
money, and keep budgets in safety.
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Buy fixed assets and do other assignments.
Inspect and assess the reliably, the strength and
effectiveness of internal controlling system, risk management,
asset safety and human resource using in the branch.
Appraise the reality, reliability of management and
Checking-up
finance data as well as information system and electronic
and Internal
services.
Auditing
Look over and assess the conformity to laws and the
Department
bank’s internal rules.
Recommend solutions to resolve mistakes and improve
internal inspection system and risk management system in the
branch.
Instruct departments and staff to accomplish their
Administration functions effectively.
and Human
Set up recruitment policy to appeal excellent candidates
Resource
for the bank and then regularly improve their skills and
Department
qualifications by training courses in order that they can meet the

strategic requirement of the branch.
(Source: Administration and Human Resource Department Agribank – Huu Lung
branch)
1.1.3 Functions and missions
Being as a member of Vietnam bank for agriculture and rural development,
Agribank – Huu Lung branch is given the following assignments:
- Mobilize capital from VND and foreign currency in various forms of
opening deposit accounts, issuing certificates of deposit, bonds and other
valuable papers.
- Give medium and long term credits towards organizations, individuals,
households from all sectors.
- Trade foreign exchange by raising, lending, trading, international payment
and making other foreign exchange services in foreign exchange market
following the management policy of the Government, the State Bank and
Vietnam Bank for Rural Development.
- Issue business services including collecting cash, buying and selling gold,
setting up automatic teller machines, issuing credit cards, keeping valuable

7


papers.
- Keep capital resources in balance and regulate it amongst other branches
in Lang Son province.
- Run investment projects with enterprises in forms of buying shares if
allowed by the State Bank.
- Carry out the payment and delivery income following regulations of
Vietnam Banks for Agriculture and Rural Development.
- Publish credit services meeting the poor’s demand.
- Build up training plans and commendation strategies toward excellent

individuals as following rules of Vietnam Banks for Agriculture and Rural
Development.
1.1.4 Several business results
 Capital mobilization:
Agribank – Huu Lung branch has received all kinds of money in form of
VND, foreign currency from both individuals and business organization with
flexible interest rate. Customers’ deposits are always insured according to the
State’s regulations. Through figures from financial report in the period between
2010 and 2012, the total of mobilized capital source slightly increases from 789
billion VND to 862 billion VND. Among elements of mobilized capital structure,
VND often accounts for the majority; therefore, the increase in mobilized capital
source means the surge in VND also.
In term of structure of capital, there are some changes deposit balance from
enterprises and households. Specifically, the deposit balance from enterprises rises
by 23.1% in 2012 compared to 2010, making its contribution to the total capital
source also increase. Besides, the deposit balance from households also surges more
slowly than that from enterprises. The reason for these changes is thanks to credit
officers’ efforts in approaching enterprises and cleverness in encouraging these
customers to use the branch’s credit services. It is not denied that during 3 years
(from 2010 – 2012), the branch has made great contributions to the growth of
AGRIBANK.
 Credit activity:
The branch’s credit activity has smoothly operated in the period from 2010 to
2012. The evidence for this is proven by the changes in the total of outstanding

8


loans, outstanding loans in term of time payment, types of business, economic
sectors and bad loans ratio. It is calculated that the total of outstanding loans

decreases from 815 billion VND down to 738 billion VND, respectively in 2010
and 2012. The reason for this reduction is the tough competition in the market and
especially the bad effects of the crisis. In the total of outstanding loans, short-term
outstanding loans have still taken up the majority because of the characteristics in
business of Huu Lung district. It can be said that this is a difficult period for credit
activity of Agribank – Huu Lung branch and the whole banking system also.
 Customer services:
In recent years, Agribank – Huu Lung branch increasingly pays much
attention to customer services, thus wins customers’ trust. Namely, the branch uses
SWIFT system to do export-import goods payment, money transfer with other
banks over the world quickly and safely. Moreover, the branch also issues credit
cards, especially encourages organizations to pay salary through banking accounts.
Now, local people are familiar with using credit cards, money transfer services and
finance consulting services by phone. All positive changes show that Agribank more
and more concentrates on developing customer services and actually receives much
more customers’ confidence.
1.2 The key term definitions
1.2.1 Credit
Credit is a period of time allowed before a customer has to pay a debt
incurred for goods or services and is also an amount entered in accounts to show a
decrease in assets or expenses or an increase in liabilities, revenue or capital. In
accounts, credits are entered in the right-hand column.
“Dictionary of Banking and Finance (2003)”
1.2.2 Outstanding loan
An outstanding loan is the portion of the loan that has not been paid. As
payments are applied towards the loan balance, the amount outstanding decreases.
The lower the interest rate, the faster the balance declines when payments are made.
( />1.2.3 Overdue debts
Debts become delinquent when a consumer neglects to make previously
agreed upon payments to a lender. Delinquent debts often carry high fees and can

result in unpleasant telephone calls from debt collectors and legal difficulties. It also
9


can hurt an individual's chances of obtaining future credit cards and loans by
damaging his credit rating. (ww.ehow.com/about_7547981_delinquent-debt)
1.2.4 Bad debt
A bad debt is an amount owed to a business or individual that is written off
by the creditor as a loss because the debt cannot be collected and all reasonable
efforts to collect it have been exhausted. This usually occurs when the debtor has
declared bankruptcy or the cost of pursuing further action in an attempt to collect
the debt exceeds the debt itself. ( />
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CHAPTER II: THEORETICAL FRAMEWORK
2.1 Overview of medium and long-term credit
2.1.1 Definition of medium and long-term credit
According to Lê Văn Tề (2009), based on the term to maturity of the loans,
there are three types of credits: short-term credit, medium-term credit, and longterm credit. While short-term credit is less than 1 year and used to add to the
contemporary shortage of current capital of enterprises, medium and long-term
credit can be understood as the kind of credit, which is extended for more than one
year. Therefore, medium and long-term credit may be considered as term loans. In
the book “Term Lending to Business” (1942:2) written by Neil H. Jacoby and
Raymond J. Saulnier, “term loans” is defined as follows:
Term loans are credits extended to business concerns serves to differentiate
them from many other types of loans, also having terms of more than one year,
which are made by commercial banks, insurance companies and other financial
institutions. Term loans are closely related to, but are to be differentiated from,
purchases by banks of installment contracts arising from the sale of commercial and

industrial equipment.
2.1.2 The role of medium and long-term credit in the market economy
2.1.2.1 With respect to the economy
In economies, a demand for the medium and long-term credit is regularly
required for the reason that all enterprises always nurture the hope of developing
and broadening production’s scale, advancing technology and information
science… Especially, with respect to Vietnam’s economy, there is now an urgent
need for basic construction. Because of businessmen’s limited capital as well as
their hesitating investment psychology, the source of capital directly invested in
enterprises mainly originates from banks’ support. (Tín dụng ngân hàng, 2009, Lê
Văn Tề)
For a long-time research, Shin-ichi Fukuda also summarizes the role of
medium and long-term credit to the economy in the “Working paper No. 77 (2001)”
as below:
From the macroeconomic viewpoint, the allocation of medium and long-term
funds is warranted, if the allocated medium and long-term funds had great external
effects in increasing capital stock and production. The ratio of medium and longterm loans has positive effects on investment in the economy that has a potential
11


liquidity risk in the financial market. When there is a possibility of a liquidity
shortage, the firm’s investment decision tends to be conservative. Thus, to the extent
that the medium and long-term debt makes the liquidity shortage less likely
outcome, medium and long-term loans can have a positive impact on investment.
Moreover, effective medium and long-term credit may make a positive
influence on all fields including economics, politics and society as well as all people
in society. When the process of production develops at a higher speed, there are a
lot of changes such as a considerable increase in enterprise’ capital, social welfare
insurance, a noticeable reduction in the unemployment rate, and the great
improvement in living condition of people from all walks of life. Actually, this kind

of credit makes contributions to restructuring the investment capital, streamlining
the economy and then keeping the society in order and safe.
2.1.2.2 With respect to enterprises
Nowadays, it is believed that the medium and long-term credit is
increasingly preferable in business thanks to its conformity with limited liability
companies and enterprises’ economic condition. In the competitive economic
context, to be able to exist and develop, enterprises are under compulsion to invest
in fixed assets incessantly. One of the primary reasons for that is fixed assets are
considered as the major material in production, the important part in the total cost
price as well as the key factor in deciding competition advantages. Nevertheless, in
fact, the value of fixed assets is usually very huge. If only depending on selfaccumulated capital, enterprises must spend lots of time on renovating fixed asset.
In consequence, the sole solution for enterprises is to borrow for renovation.
Studying the role of medium and long-term credit, Lê Văn Tề (2009) makes
a comparison of the medium and long-term credit with “an efficient assistant” of
enterprises in order that they can chase up their opportunities such as widening the
production scale, increasing productivity and finally controlling the market. One of
its strong points is clear that medium and long-term credit is more flexible than
other methods of long-term capital mobilization like bonds and stocks. When
borrowing medium and long-term loans, enterprises can run their business
activities, set up lots of important projects in active way instead of have to assign
the influence before do these work as when issuing shares. Additionally, with
medium and long-term loans, enterprises have a firm grasp on maturity date so as to
accomplish their repayment mission towards banks vigorously. Thus, “medium and
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long-term credit is an effective tool supporting enterprises to achieve profit targets
safely when enterprises are in short of capital resource.”
(bankofbaroda.com/bbs/smemedtermloans.asp).
2.1.2.3 With respect to banks

“Medium and long-term credit is both an attractive source of profits and an
effectively competitive tool among banks” (voer.edu.vn).
Medium and long-term credit brings a great amount of profits and enhances
bank’s competition in commercial bank system. Consequently, it can be supported
that enhancing the number and the quality of medium and long-term credit is
considered as a strategic action for all banks’ development.
When banks sign contracts with their customers for lending the amount of
medium and long-term loans, that banks would like to build up relationships and
keep in touch with their customers for a long time in future. Furthermore, medium
and long-term credit is also an effectively competitive tool amongst banks, which
help banks draw customers’ attention toward their services. Actually, when banks
get on well with their customers, they certainly earn customers’ trust and then easily
persuade them to use the banks’ other services.
2.2 Criteria to assess the quality of medium and long-term credit
2.2.1 Overdue debt ratio
Mr. Rose (2004) supposes that the overdue debts will occur when the term
for repaying debts and interests terminates but the borrower cannot repay debts and
interests on time. Overdue debt is a situation that not all banks expect. For that
reason, banks always make every effort to minimize overdue rate as low as possible.
Decision No. 493/2005/QD-NHNN dated April 22, 2005 issuing the
Regulations on Classification of Debts and Loans Provisioning in Banking
Operation of Credit Institutions under which bank loans are classified into five
categories, which is primarily based on the period that payments of principal and
interest are overdue:
Category 1 (pass): debts that are not due and the borrower is able to pay the
principal and interest of debts in full and in a timely manner.
Category 2 (special-mention): debts that are overdue less than 90 days and
rescheduled debts that are not due.
Category 3 (sub-standard): debts that are overdue from 90 to 180 days and
rescheduled debts that are overdue less than 90 days.

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Category 4 (doubtful): debts that are overdue from 181 to 360 days and
rescheduled debts that are overdue from 90 to 180 days.
Category 5 (loss): debts that are overdue more than 360 days, rescheduled
debts that are overdue more than 180 days and debts that are subject to rescheduling
arrangements as directed by the Government.
Debts in category 3, category 4, and category 5 are considered as bad debts.
Generally, the amount of overdue debt is shown as overdue debt ratio:
Overdue outstanding loan
Overdue debt ratio =
x 100%
Total outstanding loans
In the above equation, the overdue debt is a rest of loans, which have not
been repaid to the banks; total outstanding loans are the amount of money, which
the bank pumps into the economy for a period of time (Peter S. Rose, 2004)
In terms of bank credit service, the safety is the deciding factor to build up
the credit quality. When customers cannot fulfill their debts, immediately the debt
turns into the overdue debt with higher interest rates. It is actually assumed that the
higher the overdue debt rate is, the lower the credit quality is.
2.2.2 Income from credits
In fact, it can be affirmed that the credit quality will not be high if banks do
not get any profit from their credit activities, which is an important condition for
banks’ survival and development. It means that the safety level of credit will be high
when the banks can cover the entire loans and interest as well.
Profit from credit activities
Income from credit activities =
Total income
Indeed, this indicator can show more clearly the significance of medium and

long-term credit toward all bank activities. By building up the above equation, Peter
S. Rose draws a conclusion that profit only comes from credit activities while total
income is calculated by all incomes from all bank activities (Peter S. Rose, 2004).
Furthermore, improving the credit quality becomes a meaningful action only when
it helps to enhance banks’ profitability.
2.2.3 Credit capital turnover
This criterion is often used to evaluate the ability to manage the credit capital
and the credit quality with respect to satisfying customers’ need.
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Total outstanding loan
Credit capital turnover =
Outstanding loan average
In the above equation, total outstanding loans are the amount of money,
which the bank pumps into the economy for a period, and the average of the
outstanding loan is calculated in a year.
This index also reflects the number of turnover of credit capital. It is ceartain
that the higher credit capital turnover is, the faster banks’ credit capital turnover
runs and also the more money banks lend in the production proccesses and the
good flows. In spite of only the amount of fixed capital, banks still meet enterprises’
credit needs and use the rest to pump into other areas thanks to the flexible turnover
of credit capital. In point of fact, the bigger the value of this indicator is, the better
the quality of credit and credit capital management will be (Peter S. Rose, 2004).
2.3 Factors affecting to the quality of medium and long-term credit
2.3.1 Factors from banks
2.3.1.1 Lending strategy
In reality, each bank sets up its lending strategy with a wide range of credit
methods. When publishing the lending strategy, banks’ managers carefully consider
whether the strategy’s content matches with Government’s society and economy

development policy and also whether interests of depositors and borrowers is in
harmony with that of banks. With the great lending policy, credit staff will easily
determine that loans is safe and effective or not. Moreover, banks can earn
customers’ trust, ensure the profitability and decrease the risks. In consequence,
banks should buid up one suitable credit policy at first and then determine the
effective methods of capital mobilization and catital usage.
2.3.1.2 The capability of the capital source
What the mobilized capital plays an important part in enhancing the quality
of credit means that the number of lending activities will increase if banks has lots
of capital. Moreover, the term of the mobilized capital also has a great influence on
the term, sale and income from loans.
 Capital mobilizing situation
Medium and long-term capital source is the main source in medium and
long-term credit services. The larger the amount of mobilized capital is, the bigger
banks’ capability to supply big-scaled projects with credit services and improving
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