Topic: HOW BANKS ASSESS A LOAN APPLICATION.

GIVE AN EXAMPLE
OF A SPECIFIC BANK IN VIETNAM

Subject: Money and Banking

Lecturer: Hoang Trung Lai

Students: Nguyễn Thùy Dương

Đỗ Thị Huế

Nguyễn Thị Nhường

Dương Minh Thu

Date: 29/10/2017

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 TABLE OF CONTENTS

I.INTRODUCTION……….……………………………………………………………..3
II. HOW BANKS ASSESS A LOAN APPLICATION………………..………………3
1. Appraising a legal document…………………………………………………………3
1.1
Definition…………………………………………………………………….……………3
1.2 Purposes of appraising a legal document………………………………...…….4
1.3 Evaluation methods…………………………………………………………….4
2. The 5C model…………………………………………………………………………..4
2.1
Character…………………………………………………………………………………..4
2.2
Capacity…………………………………………………………………………………...5
2.3
Capital……………………………………………………………………………………..6
2.4
Collateral…………………………………………………………………………………..6
2.5
Condition………………………………………………………………………………….7
3.
Coverage………………………………………………………………………………….7
III. AN EXAMPLE: VIETINBANK…………………….……………………………...8
1. Overview……………………………………………………………………………….8
2. Legal documents for corporate loans………………………………………………..9
3. To sum up………………………………………….…………………………………10
4. Reference……………………..………………………………………………………11

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 I. INTRODUCTION

Banks are one of the most important financial institutions because they are in the
business of supporting sound and viable financial decisions, banks must consider
every request strictly and carefully. Banks have to calculate risk and return, assess the
application of customers then decide to lend money or not. In this topic, we will show
you the detailed progress and methods about how banks assess a loan application.

II. HOW BANKS ASSESS A LOAN APPLICATION?

1. Appraising legal documents
1.1 Definition
Generally, the process of lending to customers at banks now includes steps such as
appraisal, loan decision, disbursement, debt collection. Appraisal is considered as the first
step in the loan operation process where bank credit officers come into contact with
customers and the loan application including legal documents of customers. This is a
matter that credit officers need to pay attention and consider carefully.
Legal documents are extremely important when banks decide to lend to customers. This
is the first base that can assess the reliability of the bank for customers because all risks
can be made when the bank decided to lend
Legal documents in any loan of customers when placing credit relations with banks also
include legal documents such as business registration certificate; regulations; decision on
the appointment of the representative at law; list of Board of Directors / Board of
Members; loan decision; financial report; tax reports, ect.
Credit assessment should focus on the following main contents:
 Verification of customer's status
 Appraising the production and business situation
 Analysis of financial situation
 Appraisal of production and business plans

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  Estimate and control risk
 Other contents

1.2 Purposes of appraising legal documents

The purpose of a credit assessment is to make a loan decision. The client assessment and
analysis of the loan application and loan portfolio is carried out by a credit analyst in
conjunction with the relevant client specialist. Therefore, to help credit officers and bank
leaders to be brave and avoid mistakes in lending decisions, credit assessments should
achieve the following objectives:
 Evaluate the reliability of the investment project that customers have made
and submitted to the bank when making loan procedure.
 Analyze and assess the risk level of the project when deciding on the loan.
Reduce the probability of two types of mistakes when deciding on a loan:
(1) for a bad project and (2) refusing to loan a good project.
1.3 Evaluation methods
In addition to checking, reviewing and verifying credit applications submitted by
customers, appraisers must investigate, collect, analyze and analyze customer information
sources for evaluation, comprehensive analysis.
Major sources of information include: information provided by the customers,
information from self-investigated auditors from other sources (credit information
network, media, ministry, industry associations, units have relations with customers ...)
2. The 5c methods

The 5C method refers to the five main factors that banks need to consider when making
decision whether they accept or reject an application concluding: Character, Capacity,
Capital, Collateral, Conditions.

2.1 Character

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In many cases, for many banks, customer attitudes are the determining factor if a small
loan is approved. Major issues related to suspicious behavior include: lacking of
cooperation with banks, deception, litigation and losses. Time, litigation costs, and
opportunity costs that may arise from a problem loan may be much greater than the
expected income (For loans to large corporations run by a group of fish. This indicator is
less important). In addition, lender also considers under factors:

 Loan repayment history:

Check borrower’s relationship with other lenders, banks and credit agencies
and see if they paid off on time.
 Look at personal and business credit history
 Look at education level
 Copies of all compliance-related payments such as GST and tax returns
 Historical financial information
 Report of the Credit Agency

Borrowers will make a good impression on Lenders if above factors are good.

2.2 Capacity

Specific capabilities include the ability to run a business and repay a successful loan from
a customer. This is considered the most important indicator in the 5C model. Banks want
to know exactly how customers will repay.

Capacity assessment is based on the evaluation of the factors:

 Business and executive experience

 Income
 Financial report in the part
 Market performance and competitiveness
 Debt obligations
 Living expenses

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  Dependents

From there, the bank estimates that cash flow will be used to pay off debt, repayment
time and probability of successful repayment of customers. The assessment of loan
history and repayment of loans, whether personal or commercial, is also indicative of
future ability to pay.

2.3 Capital

It is the capital invested by customers in the business. The bank will be more secure if the
customer has sufficient capital. Owner capital can be mobilized during the operation,
helping to ensure the bank's loan status. The bank also recognizes equity as an indicator
of the level of commitment and risk of the customer to his or her business and will feel
more comfortable knowing the customer will lose a lot if their business is unsuccessful. It
would be better if the capital was taken from the stockholders' own assets.

Factor lenders consider:

 Assets and liabilities

 Type / liquidity of assets
 Type / nature of the debt

The bank can use Historical balance sheets for past 3 years and budgeted balance
sheets for the next 3 years of the enterprise to help lenders assess capital.

2.4 Collateral

This is a guarantee and an alternative repayment besides the expected repayment cash
flow. The bank will consider factors of: type of asset, legal status, value of asset and
liquidity. There are two important things that a bank will consider in a secured loan:

- Type of collateral which borrower provides to the bank: it includes many types of
assets such as property, equipment, vehicle, land, plant, ect.

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 - The value of collateral at current and in the future: this is very important for a
bank because the value of collateral will change in the future, so the bank needs to
determine that the market value of collateral is sufficient across the lifespan of the
loan. So, if borrowers do not pay off the loan, the bank can sell that collateral to
make borrower’s repayment.

When the borrowers give the collateral to the bank, bank will require listing detailed
information about asset and property. It consists of purchase date, photos of the item, and
current value.

If the property is a third part guarantee, the bank will clarify the relationship between the
borrower and the third part. If the third part is an individual, bank will prefer relation with
parents, grandparents, brothers, sisters, main stockholders. If a third part is a business,
bank will evaluate this business as a borrower. In some case, the bank may require the
third party guarantee to sign a pledged guarantee to repay the loan if borrower cannot pay
off the debt.

2.5 Conditions:

The bank will be willing to offer the loan if conditions are enough good for it. There are
some the following points that the bank will consider in term of conditions:

- Repayment schedule: when borrower will pay back the loan? And how frequently
borrower pays repayment.
- Pricing: bank will consider in interest and fees. Bank earns more money if it offers
high interest and fees. Even if the loan is little bit risky, with higher interest, the
bank is more likely to accept the loan.
- Other conditions: bank considers how external impacts affect customers, puts
customers in risky situation to evaluate. For example, bank will determine how
economic recession affects sales of business and how increasing in interest rate
influences on customer repayment capacity.

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3. In addition to the 5C, the bank will evaluate one more character, coverage:

Coverage is one important part in safeguarding the risk of the borrower. Therefore, the
bank will base on coverage which customer buys to offer a reasonable loan. For example,
the bank will find potential risks if a business who is a freight carrier did not buy physical
insurance, and therefore, the bank may give that business a lower loan with high interest
rate.

III. AN EXAMPLE OF A SPECIFIC BANK IN VIETNAM: VIETINBANK

1. Overview

Of four commercial banks that are ruled over by the Government, VietinBank is
considered as the bank having the best credit quality. We will analyze the progress that
VietinBank assesses a loan application in detail.

To prepare for borrowing a loan, customers must fill out a paper required by the bank
firstly for survey and advisory, it includes personal information, and information of
borrowing demand. Except from the handouts, VietinBank has created the online form
for easy registration.

The online form compulsorily includes:

A. General information

- Area - Permanent address

- Branch - Contact address

- Customer’s full name - Mobile

- Birthday - Email

- Gender - Job

- ID/ Passport, Date and Issue by - Name of work place

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- Academic level

- Marital status

- Vehicles

- House

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B. Information of borrowing demand

- Purpose of loan

- Estimated loan amount

- Borrow time

- Total income/month

- Total cost/month

And after that the bank will contact to the customer, to make arrangement. When the
customer’s information is suitable, the bank continue requiring other legal documents
related to the customers themselves to complete the loan evaluation progress.

2. The legal documents for corporate loans

* Legal records

- Business registration certificate (the latest copies)

- Rules (Equity ratio, relative document, and it must be signed by the bank and the
customer will be lended if the capital is enough)

- Other files such as legal job, deputy, board of directors’ period (only accept the loan if
their period more than 5 years, and add report of meeting shareholders became board of
directors) are applied to business loans only.

* Financial files

- Balance sheet of the corporation

- Three latest income statements (If the corporation has been established, income
statement is not required)

- Cash flow each year (the latest 3 years)

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- Arising account balance sheet

- Detailed arising amount of corporation

- Account receivables, Account payables, Long-term debt, Short- term debt,…

* Business operating activity files

Must provide enough purchase invoices and sale invoices in contracts

- Commercial company: Production and business plan (Revenue, cost of good sold,
Expense, Depreciation,… in detail)

- Manufacturing enterprise: Cost of materials, salaries, substitutes, sale price,…

- Construction business: Revenue, Expense,…

* Collateral file

- Factories of the company

- Machines, equipments and attached documents

- Real estate assets of the third party (house, land, certificate of land use right)

- Transportation (original vehicle registration certificate, copy of certificate of registry)

* Application for credit limitation

3. To sum up

Based on the information that customers provide through these files, the bank will
consider the ability of customers to pay debt, reduce risk, and earn more benefit, and
most of its loans are feasible, but VietinBank can not avoid bad debts. However,
VietinBank is always the best bank in processing and retrieving bad debts.

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 4. Reference:

http://www.financingyoursmallbusiness.com.au/before-applying-for-a-loan-/how-the-
banks-assess-a-loan-application.html;.

https://www.finder.com.au/banks-business-loan-application; http://vietinbank.vn )

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