THEORETICAL AND PRACTICAL BASIS ON CREDIT EFFICIENCY OF COMMERCIAL BANKS
2.1. COMMERCIAL BANK CREDIT OVERVIEW
2.1.1. Commercial banking overview
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Commercial bank is a credit institution doing business in the field of money and credit with regular activities of receiving deposits, using this money to extend credit and provide other banking services to customers. organizations and individuals.
In the modern market economy, commercial banks perform three basic functions: credit intermediary function; payment intermediary function and money generation function.
With the credit intermediary function, commercial banks borrow to lend. Commercial banks often use capital mobilization to borrow money. Capital mobilization is the operation of attracting and mobilizing all idle monetary sources in the economy to create business capital for commercial banks and is reflected in the capital structure of commercial banks, including: capital own and mobilized capital.
After raising capital, commercial banks can use a part to lend or invest and this activity is often called capital use. The operation of using capital of commercial banks includes the following activities:
First, treasury operations : Commercial banks must keep a reserve of cash in the following forms: Cash at the bank's fund, required reserve and payment deposits at the Central Bank, and deposits at other commercial banks. , cash in the process of collection ... to ensure the ability to pay, timely and fully meet the withdrawal needs of customers.
Second, credit operations: Bank credit includes the following forms: loans, discounts, guarantees and financial leasing, in which lending is considered the main profitable activity of commercial banks. .
Third, investment operations: A business in which commercial banks use their capital to buy securities or invest in projects.
With the payment intermediary function , commercial banks stand in the middle to make payments for goods and services to the transaction parties. Thanks to commercial banks, the transaction parties do not have to transfer cash directly to each other, but only need to open a deposit account at the commercial bank. Through special documents issued by the transaction parties according to the convention with commercial banks such as checks, collection orders, payment orders, etc. The commercial banks make clearing between accounts.
Commercial banks perform the payment intermediary function through intermediary operations on behalf of customers to make payments or other entrustments to collect fees. The main intermediary services include: Money transfer - payment for households; collection service; trust business; payment services for other credit institutions…
The function of creating money of commercial banks is done through the act of granting credit from customers' deposits. In fact, customer loans also return to commercial banks in the form of money in the account. Thanks to the funds in the account, commercial banks can make payments to customers without using cash.
Today, commercial banks play an extremely important role in the national economy. Thanks to commercial banks, idle money, even if it is small, is concentrated and allocated to production areas that need investment capital. In this respect, commercial banks not only make capital turn around faster, wealth produces more per unit of time, but resources are also allocated and used better. In particular, commercial banks make commodity transactions more and more possible to perform on a large scale, reducing transaction costs, convenient payment methods, thereby stimulating the development of commodity economy. , promote specialization and improve social labor productivity. Multi-purpose commercial banks also provide convenient services for people such as asset management, investment consulting, money transfer, etc.
Due to the central role in the financial system, the activities of commercial banks not only affect the banks themselves, but to a large extent, the macroeconomic environment, thereby affecting all other organizations and individuals. Therefore, governance so that commercial banks not only operate stably, but also have high efficiency, especially efficiency in performing the financial intermediary function, is a vital requirement of each commercial bank as well as of the country. .
2.1.2. The concept and characteristics of commercial bank credit
126.96.36.199. Bank credit concept
In essence, credit is a borrowing relationship based on trust. Originally, the term credit is derived from the Old Latin word "Creditum", which means trust, confidence.
According to C.Mark: "Credit is a process of temporary transfer of an amount of value from the owner to the user, after a certain period of time, an amount of value greater than the original value is recovered." 23].
Modern economists, have studied and given many different definitions of credit. Economists A.Arerit and Ksuk define credit as follows: “Credit arises between one party (lender) giving another party (borrower) the right to use a certain amount of money, of which the person Borrowers are obligated to repay the loan amount on time. In order to have the right to use that capital the borrower must pay a compensation, i.e. interest”. According to Opst and Khimt Nher, the characteristic of a credit relationship is that “the lender immediately performs its obligations but only receives benefits in the more distant future. The special risks of the credit action mainly derive from that” . According to these two definitions, credit is understood as the relationship of giving up the right to use money in the present in exchange for the right to enjoy interest in the future. Here,
Along with the development of the market economy, credit relationships have been expanded to a number of complex economic fields such as: commodity credit.
(selling goods on credit, collecting money later), lending in various forms, discounting, guaranteeing, depositing... In each of the above-mentioned credit relationships, the related parties usually have to comply with a number of commitments such as: : the condition for the delivery of goods or money; the term to use such goods or money; time will have to refund money or goods with certain commitment conditions.
The process of making credit actually includes not only two separate processes of lending and repayment, but also the process of using loans made in the field of production and trading of goods. Thus, the credit process is carried out according to the following cycle: lending, using capital and repaying. During the use process, if the borrower encounters a problem and cannot recover the capital, the lender may have to bear part of the consequences according to the provisions of the law on bankruptcy, dissolution or debt settlement in court...
From a narrow perspective of banking and finance, credit is understood as follows:
- From the perspective of money transfer from subjects with idle money to subjects lacking money for use, credit is considered a channel of money transfer from lenders to borrowers.
- In a specific financial relationship, credit is a transaction on the right to use assets on the basis of a commitment to yield the right to use a term along with the obligation to repay both capital and interest.
- In the banking sector, credit also means lending activities
banks, relatively independent of capital mobilization activities.
From the above analysis, in line with the practice of the banking industry that considers credit as a lending activity, it can be understood that credit is a lending activity through the temporary transfer of an amount of value from commercial banks to customers. loan - customer on the basis of a credit contract with a commitment to be secured by the borrower's assets or reputation, with an effective business plan accepted by the commercial bank according to the term and interest rate agreed between the commercial bank and borrowers.
According to this understanding, credit is an activity for borrowers of commercial banks. This lending activity is subject to the following requirements:
- Consistent with the principles, functions and tasks of commercial banks.
- Customers must ensure the trust of commercial banks on the following levels: prestige in the customer credit rating list; have an investment project or plan that has been appraised by commercial banks as effective, capable of recovering capital and paying interest.
- Credit relationship must be institutionalized by credit contract with
The commitments of the two parties are clearly written and protected by law.
- The loan size, term and interest rate shall be agreed and determined by the two parties
in the contract must not contravene the provisions of law and the State Bank.
188.8.131.52. Bank credit classification
Along with the increasingly sophisticated and profound development with the large scale of the market economy, the forms of banking business in general, the form of credit in particular has also developed very diversely and abundantly to meet the needs of customers. better respond to customers' needs, on that basis diversify investment portfolios, attract customers, increase profits, spread risks and strengthen competitive strength.
Bank credit can be classified in many ways
Firstly, classification is based on banking operations. In this way, commercial banks have some main types of credit as follows:
Advance Loan: A type of loan in which the bank provides the borrower with a certain amount of money to use in advance. Borrowers only pay interest at the time of principal repayment, there are two types of advance loans: secured advance loans and unsecured advance loans.
- Loan by limit: A form of loan in which the bank and the customer agree in advance the maximum amount (called a credit limit) that the customer can borrow from the bank for a certain period of time. usually 12 months). After agreeing on the credit limit, the customer can accept debt in installments without having to apply for a loan, provided that the total amount of the debt does not exceed the signed credit limit.
- Overdraft loan: A special form of advance credit in which the bank allows customers to spend in excess of the balance on the current account within a certain limit and term on the basis of a credit contract. signed between the bank and the customer. The level of credit in an overdraft loan is not a loan amount, but only when the customer uses the overdraft will it be considered that the credit has been granted and interest begins.
- Discount lending: A loan in the form of commercial banks to buy back undue commercial paper at a price lower than the amount stated on the commercial paper. At maturity, the bank will claim the full amount stated on the commercial paper from the drawee. The bank's profit is the difference between the purchase price and the amount stated on the commercial paper.
Factoring: An operation in which a bank's subsidiary commits to buy back undue payments arising from the export, supply and supply of goods and services. services at a discounted price. These liabilities are usually short-term (30 to 120 days).
Leasing: is a medium and long-term form of credit made through leasing assets such as machinery, equipment, movables and other real estate at the request of customers and holding them. ownership of the rental property. The lessee uses the leased asset and pays the rent throughout the lease term as agreed by the two parties and must not cancel the contract before the due date. At the end of the lease term, the lessee is entitled to transfer ownership, buy back or continue to lease the asset according to the terms agreed in the lease contract.
Guaranteed credit: A form of bank credit that is not directly loaned to customers with money, but by the bank's reputation through the issuance of a guarantee certificate, the bank commits to perform an obligation in the future. future for the beneficiary of the guarantee. When due, if the guaranteed is unable to perform the commitment, the guarantor bank is forced to perform the agreed commitment.
Second, classified by credit term. According to this classification, bank credit has short-term, medium-term and long-term credit categories.
Short-term credit : is lending with a term of no more than 12 months. Short-term credit is often used by customers to supplement working capital and cover temporary capital shortage needs.
Medium-term credit : is a lending activity with a term from one year to five years. The purpose of this type of credit is that customers want to raise capital to invest, renovate fixed assets, cover the needs of purchasing fixed assets, improving or renewing technological equipment, construction new projects with small scale and fast payback period.
Long-term credit: more than 5 years. The purpose of this type of credit is to finance large projects with a long payback period.
Third, classified according to the form of loan security. According to this classification, there are types of secured credit and unsecured credit:
Asset-secured credit : is a type of credit based on loan security assets such as mortgages, legal pledges of customers or secured by assets of a third party with commitments. . Asset security is a legal basis for banks to have other sources of income in case customers fail to repay loans through the sale of mortgaged or pledged assets.
Unsecured credit : is a type of credit without collateral or pledge, but the bank's lending is only based on the creditworthiness and financial capacity of the customer. To qualify for this type of credit, the customer must meet the following conditions:
+ Reputable, trusted by the bank in using it for the right purpose
loan capital, fulfill the obligation to repay the loan on time, both principal and interest in the past.
+ Having feasible and capable projects and plans for production, business, and services
debt repayment and loan interest, plans and projects must conform to the provisions of law.
+ Having financial capacity to fulfill loan repayment obligations on time.
Fourth, classified by the purpose of using capital. According to this classification, there are types of real estate credit, industrial and commercial credit, agricultural credit and consumer credit:
Real estate credit : is a type of credit related to the purchase and construction of residential real estate, land, real estate in the fields of industry, commerce and services.
Industrial and commercial credit : is a type of short-term loan to supplement working capital for enterprises in the fields of industry, commerce and services.
Agricultural credit : is a type of loan to cover production costs such as fertilizers, pesticides, plant varieties, animal feed, labor, fuel, etc.
Consumer credit : is a type of loan to meet consumer needs such as buying expensive items. Today banks also make loans to cover ordinary expenses of life through the issuance of credit cards.
Fifth, classified according to the form of the value of credit. According to this classification, there are types of credit in cash and credit in assets.
Cash credit : is a type of credit where the value of the credit is expressed in money. This is the main type of credit extension of banks and the implementation by different techniques such as advance credit, overdraft, seasonal credit, installment credit, etc.
Asset credit : is a form of credit with physical goods. Granting credit with assets is very popular and diverse. Commercial banks often apply credit with assets in the form of lease-purchase financing. Under this method, commercial banks provide assets directly to borrowers (commonly known as lessees) and periodically repay loans including capital and interest.
Sixth, classified by loan repayment method. In this way there are installment credits, one-time installment credits, and on-demand repayment credits.
Installment credit : is a type of credit where the customer must repay the principal and interest periodically. This type of credit usually applies to real estate loans, housing loans, consumer loans, loans to small businesses, loans to agricultural equipment.
Final installment credit : is a one-time payment loan
both principal and interest as agreed in the contract.
Repayment credit on demand is a type of credit that applies technology
overdraft according to credit policy for each specific case.
Seventh, credit classification by origin. In this way there are direct and indirect types of credit.
Direct credit : is a type of credit in which the bank provides capital directly to the person in need, and the borrower directly repays the loan to the bank.
Indirect credit : is a type of credit in which the bank lends through the acquisition of contracts or documents that have arisen still within the payment term.
184.108.40.206. Features of commercial bank credit
Unlike other types of credit , bank credit has the following characteristics:
Firstly, bank credit is the main business method of the bank. If in other credit relationships, for example, commodity credit, the participants in credit activities only consider it an additional act to serve their main business, so the interest rate is not a daily concern. head. Meanwhile, for banks, the issue of interest rates is very important because the price of banking services is a decisive factor in the profitability and competitiveness of banks. Therefore, commercial banks often put interest rate policy as the focus of their business strategy.
Second, bank credit is the act of banks selling the right to use assets for a definite time to customers. In order to have goods for sale, instead of production, commercial banks have to borrow to lend, so the bank's credits must be planned in a scientific and reasonable way, so that the bank can take ownership. return the mobilized capital and not leave the capital to bear short interest. Therefore, when determining a reasonable loan term, banks must base themselves on the nature of their capital's term and the borrower's capital use process. If the bank has stable long-term capital, it can provide long-term credit. On the contrary, if the bank's capital is not stable and must be compensated with short-term deposits, the ability to grant long-term credit is difficult.
On the other hand, the loan term must be consistent with the borrower's capital turnover cycle in order for the borrower to be able to repay the loan on time. If the bank determines the loan term is smaller than the borrower's capital turnover cycle, the customer will not have enough resources to repay the loan when it is due, causing difficulties for the customer. Conversely, if the loan term is larger than the capital turnover cycle, it will create conditions for customers to use the loan for improper purposes, potentially posing credit risks to the bank.
Third, bank credit is regulated by national monetary policy. Sometimes, in order to stabilize the economy's macro, the State Bank issued policies to intervene on the scale, limit, and interest rates of credit in a way that was unfavorable to commercial banks, but commercial banks still had to comply. Especially, at a time of hot economic growth, customers are thirsty for capital, the interest rate they can accept is large compared to the deposit interest rate, but commercial banks cannot lend beyond the regulations of the State Bank. Or in inflationary conditions, in order to mobilize capital, commercial banks must offer a positive real interest rate and at the same time must meet the high reserve requirements of the SBV, so it is difficult to lend, and the risk of large losses is high.
Fourth, bank credit is a very risky activity. Item
The money that the bank lends is very large compared to the interest earned. Meanwhile,
Whether or not capital can be recovered depends not only on the customers themselves but also under the influence of the business environment, world market fluctuations, natural disasters beyond the control of both the customer and the bank. When customers have difficulties, when the business environment is not favorable, credit activities of banks are also difficult. In the event of customer bankruptcy, natural disaster, economic crisis, etc., the bank may fall into a state of capital loss, large bad debts affecting the bank's operational efficiency.
Fifth, bank credit must comply with the strict legal regulations of both the state and the commitment in the contract. The process of applying for a loan and lending must comply with strict civil and credit legal regulations such as: borrowing must be according to a credit contract, a loan agreement, a loan security contract, a guarantee, ..., in where the state commits to protect the property rights of the parties to the transaction according to the law through a court or arbitration, the borrower must commit to unconditionally repay the loan to the bank when it is due, the financial settlement when the borrower is unable to repay the due debt…
For commercial banks operating in the fields of agriculture and rural areas, credit activities, in addition to the common characteristics of commercial banks, also have their own characteristics. Firstly , the target customers for loans in the field of agriculture,
rural areas mainly borrow loans of small value compared to other sectors. In agricultural countries, the number of customers with loan needs is often larger than in other sectors. However, due to low income and economic conditions in rural areas and people working in the agricultural sector, there is often no collateral for loans, or if so, the value of the property. Mortgages are usually very small. This fact greatly affects the credit efficiency of banks when lending to these subjects.
Secondly, the risk to credit activities for agriculture and rural areas is often higher than that of other areas because the agricultural sector is an area with many risks due to natural disasters, weather, epidemics, etc. This affects
to the borrower's ability to repay, thereby easily leading to the formation of bad debts, negatively affecting the credit efficiency of the bank.
2.1.3. The role of commercial bank credit
In the market economy, bank credit has three basic roles:
One is centralizing and allocating monetary capital on a loan-and-repayment basis.
Centralization and redistribution of monetary capital are two unifying processes in the operation of the credit system. Here, the presence of credit is seen as a bridge between the supply and demand for monetary capital.
Thanks to credit activities, new commercial banks have the need to mobilize all idle money in the population to make loans. Putting money into commercial banks, people with idle money can enjoy an appropriate interest without having to manage assets like when investing, and at the same time can enjoy other banking facilities such as money transfer, security. property, payment…
Customers who borrow capital at commercial banks have the conditions to invest and earn profit in the condition that they do not have enough financial resources to invest. Thanks to the support of bank credit, the physical capital (machines, raw materials that have been produced in the warehouses of enterprises) of society are brought into the cycle of continuous reproduction, through That creates more wealth for society, creating conditions to improve the living conditions of the population. In this respect, credit plays a role in improving the overall efficiency of the economy.
Through consumer credit, commercial banks contribute to regulating supply and demand in the market of goods and services, supporting economic organizations and families to overcome difficulties caused by their mismatched income and expenditure flows. , especially businesses. In other words, thanks to the regulation of bank credit, economic actors can conduct production and consumption activities even if their revenues and expenditures do not match in time.
Secondly, bank credit contributes to saving cash and expenses
transportation fees for society.
Bank credit activities contribute to saving cash and circulation costs for society in the following stages: