Expanding to Lend Productive Household Case Study: Agribank - Quang Binh Branch Nguyen Huu Phu, Duy Tan University, Danang City, Vietnam. Ho Dieu Thuy, Graduate Student of Duy Tan University, Danang City, Vietnam. Le Duc Toan, Duy Tan University, Danang City, Vietnam. Ho Thi Phi Yen, Duy Tan University, Danang City, Vietnam. E-mail: hothiphiyen@gmail.com Abstract The function of commercial banks is to borrow for lending. For sustainable development, commercial banks must ensure that loans should have been repaid principal and interest on time. Productive Household (PH) is identified as an autonomous economic unit which the State allocated land management to use in production, and is allowed to trade in some areas due to state regulations. PHs need the strong support from commercial banks in terms of capital for production and business. However, lending productive households is increasingly difficult due to the small loan size, high operational costs... Given the fact that most of the population is employed in agriculture, expanding to lend PHs is an urgent requirement in the near future for commercial banks in general and for Agribank Quang Binh branch in particular. Key Words: Sustainable development, commercial banks, productive household, outstanding loan, risks, interest. 1
1. Problem Vietnam's population is estimated at approximately 90 million, of which nearly 70% of workers living in rural areas and working mainly in the agricultural sector. In the past years, the State paid special attention to economic developing policies to modernize agriculture and rural areas. Productive Household (PH) is identified as an autonomous economic unit which the State allocated land management to use in production, and is allowed to trade in some areas due to state regulations. With labor available, family households are permitted to trade, convert crops and livestock within their assigned area. To achieve these goals, they need money to invest in production and business, to convert plants and animals, to cultivate high value crops, great value animals to increase revenue, create jobs for themselves and their families as well as apply science and technology into practice. Therefore, they need commercial banks to support capital for them to do the plans - breed or do the business on their homeland. Since the functions of commercial banks is to borrow for lending, the commercial banks should have been repaid the principal and interest on time. Consequently, they ensure to operate normally, adapt the capital requirement for productive households and the economy. In fact, lending productive households is increasingly difficult due to the small loan size, high operational costs,..., greatly affected loan contracts, got potential risks. Therefore, extending to lend that must be accompanied by enhanced quality and safety of credit is the top target of the bank. 2. Theoretical Foundations According to Decision No. 1627 / QD-NHNN dated 12/31/2001 of the Governor of State Bank of Vietnam, the concept of lending to be understood as follows: "Lending are a form of credit, under which the lender transfers for customer an amount to be used for the fixed purpose and period by an agreement with repayment of principal and interest " Productive Household (PH) is understood as an autonomous economic unit, based on a household, doing one or several productive activities, but certainly unregistered to establish enterprises under the Enterprise Law. Expanding to lend PH in this study was to understand the process that the bank increase size of lending PH through loans growth, innovate and diversify the lending structure in line with the market characteristics, along with credit risk control; improve and enhance the quality of loan service, satisfy better customer needs. 2
3. The current situation of lending Productive Households in the Agribank - Quang Binh Branch 3.1 The number of Productive Households Table 1: Proportion of PH Customers Unit: Customer Criteria Year 2012 Year 2013 Year 2014 Customer Total 35.753 32.601 33.551-3.152-8,82% +950 +2,91% PH customers 30.651 25.406 24.862-5.245-17,11% -544-2,14% Proportion (%) 85,73 77,93 74,1 We see that the number of PH customers has downward trend. 3.2 Outstanding loans and Proportion of PH outstanding loans Criteria Outstanding loans Total Year 2012 Table 2: Proportion of PH outstanding loans Year 2013 Year 2014 (%) 3.723.186 4.148.189 4.458.272 425.003 11,42 310,083 7,48 Customer 35.753 32.601 33.551 PH Outstanding loans 2.159.868 2.207.880 2.447.065 48,012 2,22 239,185 10,83 Customer 30.651 25.406 24.862 Proportion 57,01 53,23 54,89 11,3 77,14 Table 2 shows the outstanding loan situation of the branch in 3 years 2012 2014. According to this, the outstanding loans of PH accounted for a small portion (53-57%) in total loans and the number tends to continually rise but slowly. The proportions of outstanding loans demonstrated the imbalance in the structure of economic factors. Quang Binh Province has 6 districts, 1 city and 159 communes, precints and towns. People in agricultural and rural areas made up more than 70% in total poplulation and over 72% in labor force. The population of Quang Binh province was 857.924, mostly concentrating in rural area. The work force with over 510.000 accounted for 60% in total population, people working at economic industry made up 92.08%, mainly in agriculture (66.4%). With the reality of local economic characteristics, size and network of branch and the current human resources, the proportion of PH loans was not consistent with the actual situation and its efficiency was also 3
not high. So in order to clarify it, we need to consider and examine the PH loans in 3 years from 2012 to 2014 based on some norms such as: Table 3: PH outstanding loans classified by Form of guarantee PH outstanding loans Without Pledget assets (±) % (±) % 2.159.868 2.207.880 2.447.065 48.012 2,22 239.185 10,83 342.569 360.672 446.395 18.103 5,28 85.723 23,77 Proportion 15,68% 16,34% 18,24% 37,71% 35.84% With Pledget assets 1.817.299 1.847.208 2.000.670 29.909 1,65 153.462 8,31 Proportion 84,14% 83,66% 81,76% 62,29% 64,16% Table 4: PH oustansing loans classified by Terms PH outstanding loans Short-term oustanding loans (±) % (±) % 2.159.868 2.207.880 2.447.065 48.012 2,22 239.185 10,83 2.159.868 1.294.259 1.487.999 40.785 3,25 193.740 14,97 Proportion 58,03% 58,62% 60,81% 84,95% 81 Mid/Long-term oustanding loans 906.394 913.621 959.066 7.227 0,8 45.445 4,97 Proportion 41,97% 41,38% 39,19% 15,05% 19 Table 5: PH oustansing loans classified by lending methods PH outstanding loans (±) % (±) % 2.159.868 2.207.880 2.447.065 48.012 2,22 239.185 10,83 Direct lending 1.713.141 1.726.680 1.909.417 13.539 0,79 182.737 10,58 Proportion of outstanding loans 79,32 78,12 78,03 28,2 76,4 Through groups 446.727 481.200 537.648 34.473 7,72 56.448 11,73 4
Proportion of outstanding loans 20,68 21,79 21,97 71,8 23,6 Table 6: PH oustansing loans classified by fields in Quang Binh Angribank 2013/2011 2014/2013 (±) % (±) % PH outstanding loans 2.159.868 2.207.880 2.447.065 48.012 2,22 239.185 10,83 Agriculture 1.572.557 1.473.211 1.675.323-99.346-6,32 202.112 13,72 Proportion (%) 72,81 66,73 68,46-206,92 84,5 Fisheries, aquaculture 287.018 343.620 419.681 56.602 19,72 76.061 22,14 Proportion (%) 13,29 15,56 17,15 117,89 31,8 Others 300.293 391.049 352.061 90.756 30,22-38.988-9,97 Proportion (%) 13,9 17,71 14,39 189,03-16,3 3.3 The growth rate of PH loan sales The purpose of this analysis is to compare the growth rate of loan sales over the years in order to evaluate the lending possibility, find customers and evaluate the effectiveness of the growth of PH lending scale, it is necessary to specifically analyze the norms of loan sales within the time-limit and in each industries. Through these evaluations, we can get capital allocation plan, reasonable loan source structure which are consistent with the network size as well as investment objects. Table 7: PH loan sales classfied by Terms in Quang Binh Agribank (±) % (±) % PH loan sales 2.696.228 2.857.300 3.200.275 161.072 5,97 342.975 12 Short term 1.625.194 2.062.858 2.250.991 437.664 26,93 188.133 9,12 Mid term 1.071.034 794.442 949.284-276.592-25,82 154.842 19,49 The actual researches show that the fluctuation of interest rate had a big influence on the time-limit structure: 5
Criteria Table 8: PH lending rate in Quang Binh Agribank 2012 2013 2014 Short-term PH lending interest rate 19,75% 15,50% 12,5% Mid/Long-term PH lending interest rate 20,58% 18,25% 15,5% Looking at Table 8, after considering the regulations of interest rate at Quang Binh Agribank from 2012 to 2014, it shows that the short-term interest rate was always lower than the mid or long-term rate. Short-term loan sales grew steadily while mid and long-term sales fluctuated in inverse proportion to interest rate. With the aim of diminishing the risk of interest rate, Quang Binh Agribank had focused on short-term lending, limited mid/ long-term lending. Because of the increasing mid/long-term interest rate, customers tended to choose short-term borrowings to reduce business costs. Table 9: PH loan sales classfied by Fields in Quang Binh Agribank PH loan sales Agricultural PH Fishery PH Others (±) % (±) % 2.696.228 2.857.300 3.200.275 161.072 5,97 +342.975 12 1.785.107 1.930.058 1.990.276 144.951 8,12 60.218 3,12 215.276 256.910 269.678 41.634 19,34 12.768 4,97 695.845 670.332 940.321-25.513-3,67 269.989 40,3 As analyzed above, Quang Binh Agribank focused on short-term objects or short-term loan for the expenses of mid-term objects, this made debt background unstable, customers face a lot of difficulties when debts fall due, it also created the abstract number of loan sales, debts that led to increase the workload, pressure to the lending departments. In particular, the credit officers would be overwhelmed when speeding up loans, profit recovery management that would affect the effectiveness of PH lending extension. 3.4 The average PH outstanding loans Table 10: PH oustanding loans in Quang Binh Agribank The total number of households in the area 213.586 214.789 221.220 1.203 6.431 The poor 80.918 78.348 73.751-2.570-4.597 6
Households with outstanding loans 30.651 25.406 24.862-5.245-544 PH oustanding loans 2.159.868 2,207,880 2,447,065 48.012 239.185 The average PH outstanding loans /household 70.470 86.900 98.430 16.430 11.530 In fact, over the years, Quang Binh Agribank has carried out the policy of expanding effective credits, increased loans as well as chosen customers to invest in a deep run that would reduce the cost of PH lending activity. However, the reduction of more than 2,000 customers from late 2012 to 2014 resulted not only from the carefulselection in lending process, but also from customers need of borrowing from other commercial banks, social policy banks, People s Credit Fund in communes that would gradually reduce the market share of customers. Therefore, Quang Binh Agribank should take advantages of network and available group systems to invest in a deep way and make sure the expansion of the market share of customers in the province, especially PH force with capital needs of 50 million or less. And then it can both improve the lending expansion and implement and carry out its services, expand crossselling products based on customers with credit relationship. 3.5 Risk assessment criteria in PH lending 3.5.1 The ratios of overdue debts Along with the growth of credit activity scale, overdue debts of the branch have also increased over the years. Table 11: Overdue loans of PH Outstanding loans Total 3.723.186 4.148.189 4.458.272 - Overdue loans 53.986 98.173 101.648 - Proportion of overdue loans 1,45% 2,37% 2,28% PH oustanding loans 2.159.868 2.207.880 2.447.065 - Proportion of PH oustanding loans 58,01% 53,23% 54,89% Overdue PH outstanding loans 27.214 51.340 55.548 - Proportion 50,41% 52,30% 54,65% - The ratio of overdue loans 1,26% 2,33% 2,27% In addition to the causes from customers, the increase in overdue debts was also subjectively related to the bank. 7
Table 12: The structure of overdue PH outstanding loan Criteria Amount 2012 2013 2014 Proportion (%) Amount Proportion (%) Amount Proportion (%) + Classified by Terms 27.214 100 51.340 100 55.548 100 - Short term 21.227 78 41.326 80.5 45.827 82,5 - Mid term 5.987 22 10.014 19.5 9.721 17,5 + Classified by Time 27.214 100 51.340 100 55.548 100 - Less than 10 days 2.177 8 11.443 22 11.110 20 - From 10 90 days 7.892 29 25.340 49 30.551 55 - From 91 180 days 3.266 12 2.971 6 3.888 7 - From 181 360 days 1.361 5 1.647 4 555 1 - Over 360 days 12.518 46 9.939 19 9.444 17 These evidences above show that in the period from 2012 to 2014, Quang Binh Agribank had some appropriate measures to limit the overdue debts of PH lending. PH in Quang Binh Province borrowed small amounts and had a good sense of repayment which was showed through the low annual ratio of overdue debts and the gradual decrease in bad debts in total overdue debts which made up a small density in total overdue debts of PH. Therefore, evaluation process has an important role in improving the effectiveness of PH lending. In addition to risks of market changes, weather conditions and growth cycles of plants and animals have a big impact on the ability to repay on time of PHs in the fields of agriculture, forestry and fishery. Along with the growth of sales of short-term lending, the number of short-term overdue loans also increases correspondingly. The bank s policy on limiting the risk of interest rate and unappropriate term will make PHs difficult to gather the source of repayment when the loan is due, because they have not gathered products to earn revenues to repay for the bank. Because of due or overdue debts, the bank will put pressure on PHs. In order to repay the bank, customers have to lend money at a usurious interest rate in black markets and this makes their financial ability declined and creates chances for the black credit market developing in rural area. Besides, the inspection before, during and after lending, the implementation of measures to urge customers to repay on time which helps customers not to bear overdue interest and the use of other business measures to solve difficulties with customers such as restructuring the repayment term (term adjustment, extension ) are factors to reduce financial difficulties, increase customers repayment abilities. Therefore, the bank can lower overdue debts, limit bad 8
debts, reduce risks of lending process, save costs for risk provisions, costs for debt management and others related to bad debts, and expand lending. 4. Causes and limitation 4.1 Objective causes 4.1.1 The impact of natural conditions The production and business activities of Productive Household are seasonal, depending a lot on the natural conditions. Recently, people in the area have continually borne the consequences of natural disasters such as flood, prolonged drought, diseases in poultry and livestock that have caused great damages to them, seriously affected the expansion of business production and incomes of citizens and reduced their abilities to repay. 4.1.2 The impact of economic environment Over the years, the economy has had a lot of changes, increasing in price of some products, inflation and fluctuations in USD, gold and gasoline prices and interest rates as well. Moreover, the intense competition in the market has pushed the credit agency into the interest rate race, making the bank s operation affected. 4.1.3 The clients The clients are mainly farmers who are self-sufficient in the distributed production status, therefore, the demand for loan and loan rates of each household is low. Besides, a lot of clients lack the knowledge, skills, techniques and production experience that leads to the efficiency of capital utilization is not high. Moreover, most of the productive households are located far from the bank and because of the inconvenient travel conditions, the bank staff meet a lot of difficulties when approaching the borrowers and manager of loan capital. 4.1.4 The management of local authorities The local authorities at some communes don t show enough care or efficiently cooperate with the bank in borrowing process of PH. The civil status and household registering book management process has many weak spots, leading to the situation that the borrowers will flee then. The coordination between the bank and authorities is not close and causes many difficulties during the process of lending and loan recovery. The planning and orientation in production are not specific enough, the authorities don t pay attention and actively search the market for farmers. Many products prices are squeezed by the private traders, then the lending efficiency of the bank is also affected because of the producers losses. 4.2 Subjective causes 4.2.1 The mechanism of banking operation Lending procedures are complicated. Loan profile is required a lot of procedures and signatures, especially the mortgage record. 9
The projects of PH are usually small, guided and appraised by credit officer so the possibility and economic efficiency are low. Rate of commission is divided unreasonably to all the organizations that cannot motivate and boost the responsibility of the loan group s leader. 4.2.2 The credit officer The qualification of the credit officer which doesn t meet the requirements and a little agriculture and rural understanding make the process of determining the loan amount, repayment period, economic efficiency and return on equity of borrower unscientific and impractical; additionally, loan effectiveness is low because the principles of checking before, during and after loaning are not always guaranteed. 4.2.3 Marketing With its wide network covering villages, communes and its largest staff in the banking system of Quang Binh Province, Quang Binh Agribank has a lot of advantages in operating, promoting, advertising and introducing its products. However, in recent years, Quang Binh Agribank has not focused on making use of its advantages to assert its brand to customers in the area through marketing. 5.1 Solutions to the banking mechanism and operation 5.1.1 Solutions to the procedure for loan to economic household 5.1.1.1 Improving lending process - Continuously improve the operation, reduce unnecessary procedures, save travelling and transaction cost for PH. - Coordinate with provincial departments, work with the provincial People s Committee and do not charge PH for authentication fee. 5.1.1.2 Implementing business process Credit officers need to carry out the evaluation process: the legal basis, production and business plan, the financial situation of the project, the effectiveness of the plan, the cash flow during implementation, raw material and ingredient supply market, markets. Besides, they need to evaluate the organizational aspects and social economic benefits of the project. 5.1.2 Solutions to lending in a good orientation In order to have a reasonable loan policy and loan amount with safety and effectiveness, it is necessary to stick to the program, the development orientation of the local economy, understand the planning project of the specific economic zones to invest in many lines, many aspects and also know the strong points and characteristics of the population in each region. 5.1.3 Solutions to choices for lending method 5.1.3.1 Focusing on lending through groups After many years, lending method through local associations or groups brings many good results to lending activities to PH. PH s demand for loans is confirmed and evaluated openly, 10
accurately and promptly by the local organizations and groups. Quang Binh Agribank should check and evaluate the effectiveness of group systems which were established and are operating, in order to dissolve or merge groups operating ineffectively to form and spread the model of lending in groups for the purpose of socializing the banking activities. 5.1.3.2 Diversifying lending methods In agricultural production in rural area, seasonality is an axiom, a decisive factor towards the loan effectiveness and harvest time of farmers. Therefore, it is essential to determine a flexible loan term, tallying with the growth cycle of crop plants or livestocks in each area and also prepare capital for the next production process. 5.2 Solutions to work of staff 5.2.1 Arranging and rotating staff - To the credit officers: The arrangement and the use of the workforce in general and the credit officers in particular need to be done scientifically. In the rural area, houses don t have addresses, streets don t have names but there are a lot of habits and customs, therefore, besides the professional expertise and etiquette, the credit officers should have experience and a thorough knowledge of the habits, customs, production experience of the localities so the lending activity will become effective. - To the manager from Transaction office: The managers should get in touch with people, customers and work closely with the local authorities to timely solve and manage the credit officers attitudes towards work when they come to the localities. 5.2.2 Training the man-power sources - There is a plan to train or re-train the credit officers in universities or in some short-term courses held by Agribank in order to improve professional qualifications and knowledge about the market. Agribank should regularly organizes professional training for credit officers to enhance their abilities to create and evaluate the project as well as guide the borrowers to make a loan plan. - Agribank needs to coordinate with the Agriculture and Fishery Extension organizations to provide the credit officers with technical economic norms, basic knowledge about cultivation and cattle-breeding. Besides, the professional exchange activities should be organized frequently among type-3 branches to improve the qualifications, expand relationship and learn the experience from colleagues. 5.2.3 Policies for rural credit officers Because of the wide, dispersed geographical characteristics, small loan amount with a large number of customers, the service cost for the work from personal incomes of the credit officers is not so small. Therefore, it is necessary to have preferential policies on income for the credit officers such as applying the payroll or provide higher allowances than other departments, ensuring the equal rights and justice, combining the profit aims with the benefits of employees. 11
5.3 Solutions to Marketing - Taking advantage of wide network and large staff of the banking system. - Creating a plan to promote and introduce products professionally. - As a worker of Quang Binh Agribank, becoming an enthusiastic propagandist through the mass media or words of mouth in order to popularize the products to families, authorities, or groups, 5.4 Solutions to reduce risks, improve financial efficiency 5.4.1 Strengthening inspection and control Loan inspection and control procedure are divided into three periods: before, during and after lending. The method of combining the credit growth with the credit quality should be carried out well and accompanied with the achievements, the spiritual and physical rewards should be also included. Besides, it is necessary to strictly treat the credit officers who break the regulations. The inspection and control need to be strengthened to prevent risks and immediately deal with mistakes. 5.4.2 Strengthening the process of analyzing and evaluating the loan amount The analysis of debts must be done regularly to collect the measures to reclaim and limit overdue debt. 5.4.3 Solutions to increase the interest rate Some particular characteristics when lending PH are small amount, large customers, unstable incomes of PH which depend on the production and business cycle of productive objects. Therefore, the period payment must be consistent with the client s income. When the customers have difficulties in repaying the principal amount, the credit officers have to help their clients to deal with them by using some methods, such as: to adjust or extend the period, not to let the clients bear the overdue interest which will decline their financial abilities. 5.4.4 Solutions to cross-selling - Assigning the developing target of products and services to each officers, especially the credit officers. - Having the rewards and the penalties consistent with the results of each individual. Avoiding lacking the penalties which leads to the unawareness of staff, especially the credit officers that will affect the general results of the whole branch. - Organizing some sessions to train each officer, especially the credit officer, the knowledge, skills of using tools of products and services. Guaranteeing that all the officers of Quang Binh Angribank thoroughly understand and proficiently use the services provided by Quang Binh Agribank. 12
References Bank of England, 2016, Understanding and measuring finance for productive investment - A Discussion Paper. Decision No. 1627 / QD-NHNN dated 12/31/2001 of the Governor of State Bank of Vietnam. Duncan Ironmonger, 2001, Household Production, International Encyclopedia of the Social & Behavioral Sciences, Elsevier Science. Financial Report of Quang Binh Agribank 2012-2014. Viet Nam Congress, 2010, Law on Credit Institutions - No 47/2010/QH12. Viet Nam Congress, 2014, Enterprise Law - No 68/2014/QH13. http://www.agribank.com.vn. 13