DUY TAN UNIVERSITY INTERNATIONAL SCHOOL PHAN NGOC TRUC QUYNH RESEARCH TO EXPAND CONSUMER LOAN OPERATION AT KIEN LONG BANK DA NANG BRANCH 2017 2019 BACHELOR OF FINANCE AND BANKING THESIS Da Nang, 2020.
OVERVIEW OF CONSUMER LOANS'S THEORY BASIC
CONSUMER LOANS OVERVIEW
As the market economy continues to evolve with diverse models and products, retailers are increasingly offering consumer loans to stimulate goods consumption Additionally, many companies are resorting to bank loans to address their working capital shortages.
First, in terms of the basis to conduct consumer loans, we are based on 2 dimensions:
The rising demand for consumer loans is driven by an increasing interest in durable goods such as homes, vehicles, and furniture, alongside a growing desire for travel experiences As consumers enjoy stable incomes, they are more inclined to enhance their living standards by investing in high-quality products, nutritious food, and modern amenities Additionally, many seek opportunities for personal development to secure higher-paying jobs, reflecting a shift towards improved quality of life and financial stability.
From a banking perspective, businesses and organizations primarily finance themselves through the issuance of shares and bonds, leading to increased competition in lending from financial companies This competitive landscape has prompted banks to broaden their focus on consumer lending to boost income Consumer lending, defined as financing for individual household expenditures, plays a crucial role in providing consumers with the necessary funds to meet various life needs such as housing, transportation, living essentials, education, and travel, especially before they achieve full financial stability.
1.1.2 The basic feature of a consumer loan
Consumer loans primarily serve individuals and households, with borrowing needs closely tied to their financial circumstances Low-income borrowers typically seek modest loans to balance their income and expenses In contrast, middle-income households exhibit a stronger demand for consumer credit, driven by a desire to finance the purchase of goods that exceed their current resources Meanwhile, high-income earners often turn to consumer credit to enhance their purchasing power or to manage flexible expenditures, as they already have capital allocated for investments.
Individuals and households seeking loans must possess full legal capacity and have clearly defined borrowing purposes The intended use of the loan should align with their consumption needs, including activities such as building or renovating homes and purchasing household items.
- A consumer loan is cyclical: The customer's demand for consumer loans not only depends on the financial situation but also depends on the economic situation at specific periods.
As economies develop, individuals become increasingly optimistic about their future, particularly regarding income growth This positive outlook naturally leads to a heightened demand for enjoyment, resulting in a noticeable increase in consumer loans.
In a period of economic crisis, people feel no confidence in the future and unemployment increases Therefore, people will inevitably limit consumption at the present time
Consumer loans tend to be expensive due to the extensive time and resources banks invest in assessing and gathering information about borrowers Additionally, the management of numerous small loans contributes to the overall costs As a result, the interest rates associated with consumer loans are typically higher than those for commercial lending.
Consumer loan interest rates are currently high and inflexible, typically fixed rather than variable Borrowers tend to focus more on the monthly payments rather than the overall interest rate, making it a less significant factor in their borrowing decisions Instead, individuals prioritize their income levels and educational attainment when considering loans Higher-income individuals are more likely to borrow beyond their monthly earnings, while those with advanced education often seek loans to achieve a desired standard of living rather than merely addressing emergencies.
Due to the substantial costs and inherent risks associated with consumer loans, banks typically impose elevated interest rates on these loans This pricing strategy incorporates a risk premium, leading to increased costs and potential losses, ultimately making new consumer credits unprofitable if not priced appropriately.
Customer debt repayment sources can vary significantly based on the purpose of the loan For business loans, repayment is typically derived from the revenue generated through production and business operations Conversely, for consumer loans, repayment relies on the individual's income.
- High risk due to the quality of customers' financial information is often not high, customers are cheating or interest rate risks when the cost of raising capital increases.
Interest rate risk is a significant factor in finance, particularly as consumer loans typically feature a fixed rate, while modern business loans often utilize variable rates tied to market conditions Consequently, an increase in the cost of capital for banks heightens their exposure to interest rate risk.
Customer risks can be categorized into two main types: subjective risks and objective risks Subjective risks arise when customers are reluctant to repay their debts to the bank and may provide misleading or inaccurate information On the other hand, objective risks occur when unforeseen circumstances, such as death, illness, or job loss, hinder the bank's ability to recover debts promptly.
- The size of consumer loans is usually small, but the number of these consumer loans is very large.
Consumer lending is divided into several categories according to different criteria.
1.1.3.1 Based on the relationship between the bank and the customer
- Direct consumer loan is a form of lending in which banks and customers meet directly to carry out borrowing procedures.
1 Banks and consumers sign loan contracts.
2 Borrowers pay a part of the purchase amount in advance to the retail company.
3 The bank pays the remaining balance to the retail company.
4 The retail company hands over assets to consumers.
5 Consumers pay off loans to banks.
Indirect consumer lending involves a process where banks and customers do not interact directly for borrowing procedures, instead utilizing a third party In this arrangement, banks purchase sales coupons from retailers, effectively functioning as a form of installment financing.
1 Banks and retail companies sign debt sale and purchase contracts Bank contracts typically state terms on who the customer can bear, the maximum amount to be sold, and the type of asset to be sold.
2 The retail company and the consumer enter into a sale and purchase contract to bear the goods, the consumer usually pays a portion of the value of the property upfront.
3 The retail company hands over assets to consumers.
4 The retail company sells the documents for sale to the bank.
5 The bank pays the retail company.
6 Consumers pay installments to banks.
1.1.3.2 Based on the purpose of the loan
Real estate consumer loans are specifically designed for purposes such as purchasing, renovating, or constructing homes and land These loans typically have a larger average size compared to standard consumer loans and come with extended repayment terms, which consequently increases their associated risks.
- Consumer loans are usually loans for the purpose of financial support for essential activities and needs in people's lives, such as: studying abroad loans,buying cars or traveling,
1.1.3.3 Based on the refund method
CRITERIA TO EVALUATE CONSUMER LENDING ACTIVITIES
- Loan sales are the amount of money the bank lends for a period (usually 1 year).
The growth rate of sales in credit activities from year (n-1) to year (n) serves as a key indicator of performance An increase in this indicator signifies a rise in the Bank's sales of credit activities, reflecting a positive trend and expansion in these services.
An indicator reflecting all debts that banks have collected when they mature at a certain time, irrespective of the lending time.
This coefficient shows how many dong of business the bank will recover from
1 business coin in a given period The higher this coefficient, the more beneficial the bank is
- Outstanding balance is the total amount of money that the Bank lends at a time
- Total outstanding loans of a bank indicate its liquidity status and its ability to meet loan demands
- Outstanding balance to each specific customer indicates the relationship of the bank and the customer mentioned above
The target reflects the growth rate of the outstanding credit loan balance in year (n) compared to year (n-1) An increase in this indicator signifies a relative rise in the bank's credit portfolio over the years, indicating an expansion in credit activities.
Bad debt (or problem debt, unhealthy debt, bad debt, bad debt ) is a debt with the following characteristics:
- Customers have not fulfilled their debt repayment obligations with the bank when these commitments have expired.
- The customer's financial situation is and tends to be bad, leading to the possibility that the bank cannot recover both principal and interest.
Collateral (collateral, pledge, guarantee) is assessed as the disbursement value not enough to cover debt and interest.
- Bad debts include: sub-standard loans; Doubtful debt; Irrecoverable debts
This is an important indicator to evaluate the expansion of credit credit activity
FACTORS AFFECTING CONSUMER LENDING
Commercial banks operate within a complex environment influenced by various factors, including socioeconomic conditions, regulatory frameworks, cultural contexts, and economic policies The socioeconomic environment, characterized by economic development levels, national income, and living standards, significantly shapes consumer behavior and drives demand for bank lending A stable socioeconomic backdrop encourages consumption, leading to increased lending activities Additionally, the legal environment, defined by state regulations, plays a crucial role in facilitating consumer lending by ensuring order and stability A well-defined legal framework not only motivates consumers to seek loans from banks but also encourages banks to engage actively in lending Conversely, vague and generic regulations can hinder effective agreements between banks and customers, limiting lending opportunities.
The cultural environment, encompassing habits, psychology, education level, and national identity, significantly influences individuals' spending habits Factors such as frugality or a tendency to enjoy life, along with aspects related to residence and workplace, play a crucial role in shaping how people manage their finances.
Consumer lending is significantly influenced by state economic policies and programs When the government increases investment or implements measures to encourage domestic and foreign investment—such as streamlining procedures and reducing taxes for new businesses—it creates a favorable environment for consumer lending growth Additionally, policies like income tax reductions and preferential interest rates for loans to farmers, low-income households, and ethnic groups in mountainous areas contribute to poverty reduction and social equity These initiatives collectively impact the consumption demand of the population both in the short and long term.
* Factors from the customer side:
When evaluating customer ethics, it is essential to consider their legal capacity and credibility, as a high and stable income does not guarantee a willingness to repay debts Borrowers may initially intend to repay loans, but factors such as status, greed, or a desire for quick wealth can lead to misuse of funds Lenders often lack complete information about borrowers, and high-risk areas may attract those seeking loans despite potential pitfalls Therefore, credit officers must assess a client's credibility based on their honesty and commitment to fulfilling all obligations in credit activities, which is partially reflected in the borrower's profile.
Legal capacity refers to the essential legal qualifications that borrowers must possess, serving as the foundation for their debt repayment obligations in credit relationships It is crucial for banks to assess the legal capacity of customers, as this evaluation helps determine if the customer is engaged in any ongoing lawsuits, particularly those involving collateral or disputes.
The financial capacity of customers significantly influences their ability to repay bank loans Families prioritize essential expenses, and many individuals are willing to make payments to the bank to prevent defaulting on their debts.
Legal issues can significantly impact an individual's career, particularly for those with unstable or average incomes For these households, bank debt collection poses challenges due to the uncertainty of when they will receive their income and whether they can accumulate enough funds to repay their loans Most consumer loans rely on the expectation of future regular income for repayment, with the exception of short-term loans.
Collateral serves as a legal foundation for banks' secondary debt collection methods, complementing the primary approach of maintaining a risk reserve However, even with collateral in place, banks face income risks if customers default on their loans, as the process of selling assets incurs time and additional costs Moreover, the market value of these assets may decline from the initial loan assessment Consequently, while collateral is a factor in lending decisions, it is not the sole determinant of a customer's borrowing eligibility.
Subjective factors play a crucial role in shaping the annual consumer lending activities of commercial banks, particularly in alignment with the bank's regulations and development strategies Without a clear and comprehensive direction for consumer loan development, banks are unlikely to engage effectively in enhancing this vital area of their operations.
A strict reward and penalty system, along with clear working protocols, significantly influences consumer lending activities by enhancing employee responsibility and customer service attitudes This rigorous approach motivates bank staff to improve their skills and qualifications, fostering a welcoming environment for customers As a result, banks not only provide comfort to their clients but also attract a larger customer base interested in their products and services.
In the realm of lending, borrower ethics are paramount, but the ethics of credit officers hold equal significance Unfortunately, some credit officers prioritize personal gain over the well-being of both the bank and its customers In a competitive banking landscape, clients are quick to seek alternatives if they perceive a lack of trustworthiness in the personnel managing their loans Therefore, it is essential for bank officials to not only possess high professional skills but also to consistently uphold ethical standards, prioritizing the interests of both customers and the institution They must be prepared to decline loans when issues arise, ensuring that decisions are made in the best interest of all parties rather than succumbing to the pressures of borrower urgency.
Effective appraisal techniques and procedures are crucial for attracting customers and ensuring accurate assessments of borrowers and loans A systematic and scientific approach to these techniques significantly influences appraisal quality, which in turn affects the overall quality of lending decisions.
Capital is a crucial factor influencing the overall operations of a bank, particularly in credit lending activities To engage in banking, sufficient capital is essential, as a larger equity capital base enables banks to broaden their range of products and services Additionally, substantial capital allows banks to invest in infrastructure and technology, enhancing their competitiveness and reputation while effectively managing operational risks.
EXPERIENCE OF CONSUMER LENDING OF COMMERCIAL
1.4.1 Consumer lending experience in some countries A, Consumer loan activity in
• Consumer lending activities in the USA
Many banks in the USA utilize automated scoring systems to efficiently process consumer loan applications This method offers customers the convenience of quickly obtaining credit results, as they can easily contact their bank via phone or online Within minutes, banks can access the customer's database and provide an immediate credit decision, enhancing the overall borrowing experience.
Consumer credit services are increasingly popular in Chinese commercial banks, with significant development since the late 1990s China Construction Bank (CCB) has been at the forefront, extending mortgage loan terms from 20 to 30 years in 1999 and increasing the loan value from 70% to 80% of the collateral's worth This evolution reflects the growing emphasis on consumer credit within the banking sector.
1999, CCB began to approve loans guaranteed by individuals, abolishing the requirement that borrowers need to be guaranteed by their employer.
Shanghai - Phu Dong Development Bank is a pioneering institution in China’s consumer credit sector, having streamlined collateral processes in collaboration with real estate companies, reducing borrower transactions from 20 to just 3 Since August 1999, the bank has also partnered with travel agencies to provide tourism loans Additionally, it has extended university training loan terms from 2 to 4 years and created a special fund to assist parents with the costs of private schooling To support these initiatives, the bank has increased its marketing staff in the consumer credit division, which now represents 20% of the total salary budget.
Chinese commercial banks face significant challenges in competing with foreign banks like HSBC, Cubank, and Standard Chartered in the consumer lending sector To prevent losing market share to these strong competitors, domestic banks must urgently consolidate their service offerings Experts suggest that the consumer sector should be divided into independent, self-managed units that can operate and account for profits separately from other banking activities.
1.4.2 Lessons learned from commercial banks in Vietnam
In many countries, banks are focusing more on consumer credit development, as it has proven to be a low-risk activity that helps stabilize their income, particularly in regions where corporate operations are less effective.
- People's understanding of issues related to consumer lending significantly affects the results and quality of this activity.
The effective management of consumer lending necessitates that banks implement stringent regulations and procedures to monitor and control credit risks throughout the entire lending process It is crucial to maintain comprehensive and current customer evaluations, as this type of credit primarily relies on unsecured loans without collateral.
Effective distribution of credit and the safeguarding of banking operations necessitate strong collaboration between the Central Bank, credit institutions, and administrative agencies.
Consumer lending in regional countries is currently challenged by several factors, including unstable income levels, underdeveloped personal credit information systems, and incomplete legal and policy frameworks governing consumer credit Additionally, the market is experiencing heightened competition due to the increasing presence of foreign banks.
CHAPTER 2 CURRENT SITUATION OF CONSUMER LOANS AT KIEN LONG COMMERCIAL JOINT STOCK BANK - DA NANG
2.1 OVERVIEW OF KIEN LONG COMMERCIAL JOINT STOCK BANK -
2.1.1 Introduction about Kien Long Commercial Joint Stock Bank - Da Nang Branch
Kien Long Commercial Joint Stock Bank - Da Nang Branch was established on July 17, 2007, under Decision No 515/QD-NHKL and officially commenced operations on October 29, 2007 The branch is located at 114-116 Nguyen Van Linh, Thanh Khe District, Da Nang City.
Since its establishment up to now, the Branch has constantly changed the mode of operation, providing services, equipped with facilities to best meet the needs of customers.
• Vietnamese name: NGAN HANG TMCP KIEN LONG
• Short for: NGAN HANG KIEN LONG
• English name: KIEN LONG BANK
• Charter capital: On September 6, 2016, it reached VND 3,000 billion
Over the past five years, the Da Nang branch has experienced significant growth, expanding its range of products and services from basic banking to offerings such as capital mobilization, lending, guarantees, and international payments By the end of 2017, the branch comprised 14 affiliated units, including one main branch and three subordinate transaction offices, employing over 100 highly qualified professionals Strategically located in the city center, the Da Nang branch boasts modern and spacious facilities, enhancing its ability to attract customers and build trust, while also providing convenient access to major clients in Hai Chau and Thanh Khe districts.
Kien Long Bank's Da Nang Branch has established itself as a reliable and efficient financial institution, thanks to the dedicated efforts of its staff The branch has successfully built customer trust, attracting a diverse clientele and experiencing significant growth in operations With an expanding network that now includes three affiliated transaction offices, Kien Long Bank is committed to providing essential capital to individuals and businesses in need of loans for production and business activities, ensuring effective financial solutions for the community.
Diagram2.1: The organizational structure of Kien Long Commercial Joint Stock
2.1.3 Functions and duties of departments
The branch director at Kien Long Bank is accountable to the General Director and oversees all unit activities in compliance with legal and banking regulations This role involves direct management and leadership of the branch, ensuring adherence to the bank's policies and operational standards.
The Branch Deputy Director serves as the second-in-command to the Branch Director, stepping in to manage unit operations in the Director's absence This role involves overseeing assigned responsibilities and ensuring the smooth functioning of the unit under their authority.
The sales department plays a crucial role in generating revenue for the branch by actively seeking out viable projects and plans from clients Credit officers are tasked with gathering borrower information, guiding customers through loan procedures, and assessing loan conditions, ensuring accountability for the loans they facilitate The department is organized into two distinct areas: a personal customer room and a business customer room, catering to the diverse needs of clients.
Acounting, treasury Department: The staff in this department are responsible for the following tasks:
- Accounting plan, monitoring, reflecting the situation of business operations, finance, management of capital and assets of the branch.
- Organizing domestic and foreign payment and money transfer services.
Individual department Phòng khách hàng doanh nghiệp
- Guide customers to open accounts at branches, set up procedures and pay savings and deposits from economic organizations and individuals; remittance payment service.
- Cash collection and payment, import-export only has the price for safe preservation of money and assets of the bank and customers.
- Preservation of collateral, pledge transferred by credit bureau.
- General archiving records, accounting documents; keep confidential documents, data
2.1.4 Consumer loan credit process at Kien Long Bank - Da Nang Branch
Customer specialist Marketing, contacting customers, receiving dossiers, evaluating, analyzing records
Examining, valuing property assets, appraising property assets
Specialist in KS & Business Director of business center
Cooperation Branch Board of Directors
Director of business center Branch Director / Administrative Council Board of Directors / Board of Directors Head Office
Sales manager Board of TD and Risk Management
Customer specialist Specialist, TD & TD Specialist
Specialist in KS & Business Cooperation
Specialist in KS & Business Cooperation
Drafting & signing credit contracts, debt acknowledgments
Making TD announcement / customer agreement
Customer specialist Track customer and loan management
Track customer and loan management
Specialist in KS & Business CooperationCustomer specialist hàng
Complete documents and carry out procedures to receive property assets
The consumer lending process at Kien Long Bank's Da Nang Branch is structured to ensure clarity and efficiency, with designated responsibilities outlined for each team member This systematic approach not only delineates tasks clearly but also enhances employee awareness of their specific roles and obligations, fostering a more organized work environment.
* Scoring system for individual customers at Kien Long Bank - Da Nang Branch