0 VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS HOÀNG MỸ CONSUMER LENDING IMPROVEMENT – THE CASE STUDY OF TECHCOMBANK MASTER OF BUSINESS ADMINISTRATION THESIS Hanoi, 2010 4 TABLE OF CONTENTS ACKNOWLEDGEMENT ABSTRACT TÓM TẮT TABLE OF CONTENTS LIST OF FIGURES AND TABLES EXECUTIVE SUMMARY INTRODUCTION 1 Background to the issue …………………………………. 9 2 Problem Statement and Research Objectives of the study 10 3 Scope and Limitation of the Research ………………… 11 4 Research Methodology …………………………………. 12 5 Research Structure ……………………………………… 12 Chapter 1: COMMERCIAL BANK’S CONSUMER LENDING - THEORETICAL FRAMEWORK FOR ANALYSIC 1.1 The Basis of Bank Lending ……………………………. 14 1.2 The Basis of Consumer Lending ………………………. 17 1.2.1 The Concept of Consumer Lending …………………… 17 1.2.2 The Nature of Consumer Lending ……………………… 18 1.2.3 The Types of Consumer Loans ………………………… 19 5 1.2.4 The Effects of Consumer Lending ………………………. 24 1.2.5 The Factors Impacts on Consumer Lending …………… 25 1.3 The Process of Consumer Lending…………………… 27 1.3.1 Receiving application and collecting information ……… 28 1.3.2 Evaluating applications …………………………………. 29 1.3.3 Approving loans ………………………………………… 32 1.3.4 Managing and collecting loans ………………………… 33 1.4 Precautions to be taken in granting consumer loans … 34 1.5 Pricing and structuring of consumer loans 35 1.5.1 Loan pricing …………………………………………… 35 1.5.2 Loan structuring ………………………………………… 37 1.6 Consumer Lending Quality ……………………………. 37 1.6.1 Consumer Lending Quality from Different Perspectives 37 1.6.2 Measuring the Quality Consumer Lending ……………… 39 Chapter 2: CURRENT SITUATION OF CONSUMER LENDING AT TECHCOMBANK 2.1 Techcombank profile ……………………………………. 44 2.1.1 History and Development ……………………………… 44 2.1.2 Vision and Mission ……………………………………… 46 6 2.1.3 Techcombank‟s Organization …………………………… 46 2.1.4 The Products …………………………………………… 47 2.1.5 Achievements ……………………………………………. 47 2.2 Current Situation of Techcombank’s Consumer Lending 47 2.2.1 Consumer Lending Process ……………………………… 47 2.2.2 Consumer Lending Quality ……………………………… 52 2.2.3 Quality of consumer loans ………………………………. 56 2.2.4 Quality of Service ……………………………………… 58 2.3 Assessment of the Techcombank’s Consumer Lending Quality …………………………………………………… 62 2.4 Development Trend of Techcombank’s Consumer Lending ………………………………………………… 66 Chapter 3: CONCLUSIONS AND RECOMMENDATIONS 3.1 Conclusions ……………………………………………… 68 3.2 Recommendations ……………………………………… 69 3.2.1 Developing the Outstanding of Consumer Loans ……… 69 3.2.2 Increasing in Capital Mobilization ……………………… 70 3.2.3 Clarifying the Responsibility of Professional Divisions …. 70 3.2.4 Applying and Revising the Credit Scoring System ………. 71 7 3.2.5 Applying Up-to-date Technology and Modern Equipments 72 3.2.6 Following Some Tactics in Evaluating Applications and Mitigating Credit Risk …………………………………… 73 3.2.7 Expanding the Key Performance Indicators (KPIs) ……… 74 3.2.8 Increasing the Quality of Information Provided by the Credit Information Centre ……………………………… 74 3.2.9 Enhancing Human Resource Quality …………………… 74 3.2.10 Responding to Changing Consumer Need and Purchasing Behavior ………………………………………………… 76 3.3 Limitations of the Research and Recommendations for Further Study 77 REFERENCES…………………………………………… 79 APENDIXES………………………………………………. 81 APPENDIX 1- QUESTIONNAIRE APPENDIX 2- TECHCOMBANK ORGANIZATION CHART APPENDIX 3: TECHCOMBANK‟S PRODUCTS 8 LIST OF FIGURES AND TABLES Figures Figure 1.1: Credit process Figure 2.1: Techcombank‟s Current Approving Process Figure 2.2 : Techcombank Outstanding of Cunsumer and Commercial Loans 2005-2008 Figure 2.3: Techcombank‟s non-performance loan situation from 2005 to 2008 Figure 2.4: Portfolios and quality of consumer loan by products in 2008 Figure 2.5: Satisfaction marks on products Figure 2.6: Level of Techcombank meeting clients‟ expectation Figure 2.7: the ratio of Non-performance loan/ outstanding of Techcombank 2007 Tables Table23.1: Some Main Figures of Techcombank Table 2.2 : Techcombank‟s outstanding of consumer and commercial loans Table 2.3: Techcombank‟s non-performing loan situation from 2005 to 2008 Table 2.4 : Portfolios and quality of consumer loan on products in 2008 9 EXECUTIVE SUMMARY This research mentions to both theory and empirical study of consumer lending. After revising the basis of bank lending, the basis of consumer lending including concepts, nature, types, effects of consumer lending and impact of technology on consumer lending, is focused. The common process of consumer lending is deeply researched in the writing containing four stages such as Receiving application and Collecting information, Evaluating application, Approval and (Managing and Collecting loans. At each stage, the readers can approach concise matters of the procedure which is implemented by banks from the beginning to the end of consumer lending process. Especially, the thesis also analyses and compares the two primary methods of evaluating loan application such as judgmental analysis and credit scoring system. Next, the precautions to be taken in granting consumer loans, the pricing and structuring loans are also mentioned. The quality of consumer lending is paid much consideration by the author. Additionally, the writing discusses the quality of consumer lending and several quantitative and qualitative criteria to measure the consumer lending quality. Moreover, based on the study of the process and quality of consumer lending, the thesis raises a case study of the Vietnam Technological and Commercial Joint Stock Bank (Techcombank) in order to better understand the circumstance. Follow the overview of Techcombank, the writing mentions to the consumer lending process, quality as well as the assessment of its customer lending performance. Lastly, some recommendations for a development of Techcombank’s consumer lending in terms of market, procedure and quality are proposed. 10 INTRODUCTION 1. Background to the issue Based on the aim of credit using, financial institutions divides their credit portfolio into two types of loans namely business loans and consumer loans. Business credit is credits supplying for customers to support their business activities such as building workshops, purchasing machinery, materials or goods or other expenditure in trading and producing process. The subject of main customers of commercial loans is enterprises. Besides, financial institutions also provide loans to individuals or their families to help them cover living cost as medical fee, learning expenses, buying houses, cars or motorcycles, etc called consumer loans. The second type of lending activity is also the subject of the research. When income and living standard increase, it certainly leads people to the change in spending habits, thus they are oriented to spend more. Again, consumer debt is an element encouraging the economy growth. Since the 1920s, American manufacturers have relied ever-increasingly on consumer loans to absorb the tremendous productivity increases of mass production, in other words, consumer credit made mass consumption possible. To financial institutions, consumer lending is of the most profitability with reasonable risks. Vietnam has witnessed a high growth rate of people, improved average earnings and considerable changes in spending behavior of individuals in recent time. In particular, the young age people who have a stable occupation and income, demands in more consumptions. Therefore, looking for the financial solutions such as bank‟s consumer loans is completely understandable. Identifying that market trend, understanding the role and prosperity of this lending category, banks continuously increase the 11 proportion of consumer loans in their credit portfolio. Nevertheless, for a firm development of consumer lending, it is vital for Vietnamese commercial banks to have overview and deep insight in consumer lending activity, in order to evaluate the quality of the bank‟s consumer lending situation and give out some prompt and reasonable solutions. In this context, the Vietnam Technological and Commercial Joint Stock Bank - Techcombank is selected as a case study for this research. Techcombank is customer driven institution supplying a wide range of high quality services to customers. In terms of individuals, Techcombank provides a variety of financial services including demand deposit accounts, savings, loans, payments, credit and debit cards, investment, guarantees, and safe custody facilities. The key products to these customers are cards, personal loans, and home loan. These assets obtain over 30% of Techcombank‟s loan portfolio. However, along with the current rivals and new comers of advanced technology, professional management and sound strategy, this bank will be under the pressure of harder competition. Given these facts, it is necessary for the bank to clearly define weaknesses and strengths of its consumer lending performance and address suitable solution for not only the improvement of consumer lending quality but also the expansion of this activity. 2. Problem Statement and Research Objectives of the study Obviously, the consumer lending is implemented by almost commercial banks. However, there is a lack of efficiency in this activity, for instance, complicated procedure, time-consuming lending process, shortage and imperfection of information, lack of regulation, inexperienced staff, poor loan monitor, etc. The consequences are high proportion of un-performing loans and risk problems of capital loss. And Techcombank is a bank of high percentage of consumer loans in the credit portfolio and individual 12 customer‟s targeting, the research attempts to explore the process and the quality of consumer lending, thus, propose some recommendations through analyzing a case study of Techcombank. The research objectives are: To review the fundamental issues related to consumer lending in order to study the necessity and complexity of controlling quality of consumer lending; To enumerate the precautions to be taken in evaluating consumer loan applications; To analyze the current situation of Techcombank‟s consumer lending in order to identify the problems exisiting and new findings regarding to the consumer credit activities and quality controls; And finally, based on these new findings and the development trend of the Techcombank, To propose some solutions and recommendations to improve the quality of consumer lending and to expand the bank‟s consumer lending market in the future. 3. Scope and Limitation of the Research The research focuses only on the literature of consumer lending and process of consumer loan applications. It does not cover the business lending or commercial lending of financial institution. Consumer lending is carried out by most financial institutions, however, the research is aimed at examining only the process and evaluating the quality of the consumer lending through a specific case of the Vietnam Technological and Commercial Joint Stock Bank; other financial institutions are excluded. The quality of data is not updated enough (for analysis the Techcombank performance, the data is collected from up to the year of 2008). [...]... provides a theoretical framework for the study of bank lending in general and consumer lending in particular The chapter also emphasizes on how commercial banks process consumer loan application and how they measure the quality of their consumer lending activity 13 Chapter 2 – Case Study of Techcombank: This chapter identifies the current performance of consumer lending in Techcombank; and analyzes the procedures... limitation of the paper and gives recommendations for further research 14 Chapter 1: COMMERCIAL BANK‟S CONSUMER LENDING - THEORETICAL FRAMEWORK FOR ANALYSIC This chapter will firstly study the basis of bank lending and the more details in basis of consumer lending activity, for example, concept, nature, types, effect of consumer lending The process and measurement of consumer lending are also mentioned 1.1 The. .. issue, the following factors can assist: track record of the individual (the longer the relationship, the better it is), the loan‟s purpose (lawful and consistent with the loan policy of the bank), the integrity of the borrowers (ability and willingness to repay the loan), and the spending habits Capacity to repay- If satisfied that the purpose of the loan is genuine and if the character checks on the. .. savings account with the bank - Borrowers must sign loan documents in the presence of an authorised bank officer and preferably at the branch of the bank - Loans should normally be not given to repay an existing loan from another source - In the case of salaried borrowers, their salary should be credited by the employers directly to a savings account with the bank - In the case of fixed interest loans,... Consumers often spend more than what they can reasonably service out of their income 1.2.4 The Effects of Consumer Lending According to recent studies, consumer credit is often of the most profitable assets of financial institutions These loans are often priced at a high interest rate due to the assumption of its higher risk Banks satisfied a large market when most consumers purchase first, then sponsorship... procedures of processing consumer loan which are implemented by related departments Apart from an illustration of the Techcombank s current approving process, a comparison of the Techcombank s consumer lending quality with the benchmark (the Hong Kong and Shanghai Bank Coporation) is implemented to investigate strong and weak points of the bank Especially, the quality of consumer loans of this bank... banks The lending officer of the bank subjectively interpreted the information provided by the applicant, keeping in view the bank‟s lending policy, and decided to accept to accept or reject a loan Banks thus relied on the judgment of their officers, who were usually given adequate training before they started as lending officers Judgmental lending was not only subjective but also time consuming The. .. sources Owner-occupied home loans are generally paid out of the household income of the owners, while investment home loans are generally repaid out of the rental income of the property Accordingly, the repayment capacity of an applicant is assessed differently in these two types of loan Secured housing finance is the largest single type of personal loan This form of advance has a number of distinct... branches Further, once the customer details are available on the bank‟s database, these can be used to cross-sell other products such as mortgages or insurance There is also a down side to issue of credit cards: the issuing bank has to bear the risk of loss or fraud arising out of the credit card transaction The United States has witnessed much larger losses on credit cards than on other types of loan Consumers... penalties The bank fixes the interest rate by adding a mark up (risk premium) to the prime lending rate Bank fees A further pricing asset involves the levying of fees The average borrower may have little knowledge about the fees being levied by banks There is growing criticism of the exorbitant fees charged by banks The banking industry is in the public eye and has to be sensitive to the needs of the people . 1.1 The Basis of Bank Lending ……………………………. 14 1.2 The Basis of Consumer Lending ………………………. 17 1.2.1 The Concept of Consumer Lending …………………… 17 1.2.2 The Nature of Consumer Lending. and how they measure the quality of their consumer lending activity. 14 Chapter 2 – Case Study of Techcombank: This chapter identifies the current performance of consumer lending in Techcombank; . the basis of consumer lending including concepts, nature, types, effects of consumer lending and impact of technology on consumer lending, is focused. The common process of consumer lending