Commercial Bank in Vietnam 1

BANKING ACADEMY

Commercial
Bank
Lecturer: Vu Ngoc Huong
Through the process of financial intermediation, certain asset or liabilities are
transformed into different assets or liabilities. As such, financial intermediaries
channel funds from people who have extra money or surplus savings (savers) to
those who do not have enough money to carry out a desired activity (borrowers).
They are classified as deposit-type institutions, and non-deposit-type institutions.
Commercial Banks are the largest among all deposit institution in particular and
among all financial intermediaries in general, and are also the most diversified
due to the large range of assets and liabilities they hold.

Group: Phạm Thiều Ngọc Anh – 14A7510287
Trần Lan Anh – 14A7510020
Nguyễn Thị Khánh Ngọc – 14A7510171
Phạm Mỹ Ngọc – 14A7510288
Phạm Thị Minh Phương – 14A7510189
Nguyễn Phương Thanh – 14A7510231
Bùi Bích Thuỷ - 14A7510299

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Commercial Bank |

I.

Definition

A commercial bank is a type of bank that engages in banking activities and other financial
activities such as accepting deposits, making business loans, and offering basic investment
products to earn profits and to contribute to achieve certain economic objectives.
Its liabilities are in the form of checking and savings deposits, and various types of time deposits.
Bank deposits are insured by the FDIC up to $100,000. The assets that commercial banks hold
are securities of various forms and denominations such as mortgage loans, consumer loans,
business loans and loans to state and local governments

Commercial Bank |

Total assets of a commercial bank take the lion’s share in the entire banking system. It is also

deposit-taking institution. Furthermore, the principal commercial bank’s loan is in industrial and
commercial sectors. In terms of ownership, commercial banks can exist in different types of
ownership: state-owned commercial bank, private commercial bank, joint-stock commercial
bank, etc. Commercial banks are among the most regulated forms of business due to their vital
role in the well-being of the economy.

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II.
Main functions of commercial bank
1. Treasurer for the society
Commercial banks accept various types of deposits from public especially from its clients,
including saving account deposits, recurring account deposits, and fixed deposits in order to meet
the withdrawal and payments demand according to customer requirements. These deposits are
payable after a certain time period.
This function has emerged in the early of banking operations, basing on the demand for the
safety of assets and the desire to accumulate value of the public and enterprises in the society.
For customers, by depositing money to banks, they not only ensure the safety of their property
but also earn an interest from the banks. (However, it does not exclude the possibility that bank
lost its liquidity and does not meet the withdrawal demand of customers)

For commercial bank, this function is the basis to perform payment intermediary function, and
also create major capital to conduct credit intermediary function.

Commercial Bank |

2. Payment intermediary
Because of the disadvantages of cash payment, commercial bank acts as the treasurer for
businesses and individuals. It means that the banks will perform payment requested by customers
such as withdrawing money from their deposit accounts to pay for goods and services or
collecting money to the customers’ account.
The banks offer their customers more convenient means of payment such as checks, payment
order, debit card, credit card... Depending on demand, the customer can choose the appropriate
payment.
This function brings advantages to not only the banks and their customers but also the whole
economy:
a.
b.
-

For customers:

Safer & faster
Ensure secure payment
For commercial banks:
Earn more money from charging services
Enhance the reputation and role of the banks

c.
-

For the economy:
Promote the circulation of goods
Accelerate payments
Capital flows more rapidly

In Vietnam: In the past 3 years, the payment service has seen significant development. Many new
payment services launched to meet the needs of customers

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At the end of July 2010, there were over 24 million cards with 48 card issuers and over 190

brand name cards, released nearly 11,000 ATMs nationwide.
The utility service comes increasingly diversified as gasoline purchase card, network card
purchases, utility bill payment...
The proportion of cash payments decreased , from 20.3 % in 2004 to 14.6 % in 2008 and 14.5 %
in 2009 => Non-cash payment is beginning to take shape in Vietnamese’ mind
3. Credit intermediary
Commercial bank is a credit intermediary when it makes the bridge between capital surplus and
capital shortage. Through the mobilization of idle funds, commercial bank forms a lending fund
and implements lending (mainly short-term loans) to the economy. With this function,
commercial bank acts as both the borrower and the lender.
Credit intermediary derives from the characteristics of circulating currency capital in the process
of social reproduction.
Commercial Bank |

Through credit intermediary, commercial bank has contributed to the benefit of all the parties in
relation to the depositor, the bank and the borrower and ensured the benefits of the economy:
- Depositors gain profits from their temporarily idle capital through interest income. Moreover,
bank also ensures the safety of deposits and provides customers with convenient payment
services.
- The borrower will satisfy the capital requirements for business spending, payment without

spending effort and time on finding convenient and lawful capital supply.
- Commercial bank itself makes a profit from the difference between lending rate and deposit
rate or brokerage commission. This profit is the basis for the existence and development of
commercial bank.
- For the economy, this function plays an important role in promoting economic growth because
it meets the capital demand to ensure the ongoing reproduction process and to expand the
production scale. With this function, the bank has made inactive idle capital into active capital,
stimulated the circulation of capital and promoted the business.
While sanctioning a loan to a customer, they do not provide cash to the borrower. Instead, they
open a deposit account from which the borrower can withdraw. In other words, while sanctioning
a loan, they automatically create deposits, known as a credit creation from commercial banks.
Credit intermediary is the most basic function of commercial banks, providing the basis for other
functions. Simultaneously, when treasurer and payment intermediary functions are performed
well, they will contribute to increase credit capital and expand the scale of banking activities.
III.
Major activities of commercial bank
1. Capital raising

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Raising capital has become an important content of commercial bank’s activities; enables
depositors to get nominal income through interest rate with the level of safety and high liquidity.
In addition, this activity provides banks funds to perform other activities such as granting credit
and providing banking services to customers. Looking at the balance sheet assets of commercial
banks, capital raising is reflected at the liabilities section. Thus, raising capital is also known as
professional liabilities.
The commercial bank raises capital by opening the deposit accounts or through the issuance of
debentures. Capital mobilization of commercial bank:
-

Commercial Bank |

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Taking deposits of organizations, individuals and other credit institutions in the form of
the time deposit, demand deposit and others.
Issuing certificates of deposit, bonds and other valuable papers to raise funds from
individuals and organizations in the country and abroad.
Borrowing from other credit institutions operating in Vietnam and foreign credit
institutions.

Taking the short-term loans of the State Bank.
The other form of raising capital as prescribed by the State Bank.

With the amount of raised capital, banks meet the loan demands of businesses and individuals, in
order to expand production and consumption.
Because of the business goals the commercial banks are particularly interested in attracting
deposits. Recently, most deposits are made through commercial banking system.
To mobilize idle capital from the public, commercial banks have to develop services to meet the
conditions to facilitate the transfer and withdraw money easily as well as have interest rate policy
and marketing to mobilize funds to meet the different needs of society.
2. Credit operations
Companies frequently implement a credit facility in conjunction with closing a round of equity
financing (raising money by selling shares of its stock). A key consideration for any company is
how it will incorporate debt in its capital structure, at the same time it must consider the
parameters of its equity financing. The company must look at its capital structure as a whole,
determining how much capital it needs immediately and over time, and the combination of
equity and debt that it will use to fulfill those requirements.
The amount of credit operation were calculated on the basic of documents (Balance sheets and
the Credit Risk Center), broken down according to member institutions and on the basic
document of independent financial institutions.

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There are different types of credit facilities available in commercial banks. The types of loans
that are permitted are clearly indicated in commercial banks credit policy in line with central
bank’s guidelines. Bank financing is the primary capital source for the corporations that are
going to start its new investment project. Working capital may also be financed through using
bank financing facilities all around the year. Depending upon the nature of financing in respect of
purpose, security as well as repayment terms, credit or simply loan facilities in commercial banks
have been put under the following broad categories:
a. Micro –Finance Institution’s Loan
It is a short to medium term loan granted to Micro –Finance Institution to alleviate their financial
constraints while providing credit to micro-entrepreneurs. The bank may negotiate the lending
interest rate on Micro-Finance Institution's loan. A foreign Bank Guarantee that covers 75% of
the principal loan shall be accepted as collateral.
b. Cash Credit:

Commercial Bank |

Banks lend money against the security of tangible assets or guarantees in the method. It runs like

a current account except that the money that can be withdrawn from this account is not restricted
to the amount deposited in the account. Instead, the account holder is permitted to withdraw a
certain sum called “limit” or “credit facility” in excess of the amount deposited in the account.
Once a security for repayment has been given, the business that receives the loan can
continuously draw from the bank up to that certain specified amount. The purpose of cash credit
is to meet working capital need of businesspersons
c. Overdraft
It is a form of credit facility by which customers are allowed to draw cash beyond the deposits of
their current accounts for the day to day operational needs of business.
The facility is availed to customers up to a maximum period of one year and it can be renewed
every year based on the request of customers.
d. Mortgage
A commercial mortgage is a mortgage loan secured by commercial property, such as an office
building, shopping center, industrial warehouse, or apartment complex. The proceeds from a
commercial mortgage are typically used to acquire, refinance, or redevelop commercial property.
e. Advancing loans
The loans are granted to the different sector of economy to meet the increasing needs of
economic development, the commercial bank after evaluating the prospective borrower’s
application precisely and objectively extend credit for a certain period.

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Short term loan

It is a loan granted to customers to finance their working capital needs and /or other short term
financial constraints.
A short term loan is granted for a maximum period of three years and the repayment can be in
lump sum or in periodic installments i.e. monthly, quarterly or semi-annually.
-

Medium and long term loans

These loans are extended to customers to partially finance acquisition or leasing of fixed
business assets, establishment of new projects and expansion of an existing business.
A medium –term loan has a maturity period longer than three years and not exceeding a
maximum period of seven years. Long –term loan has a maturity period longer than seven years.
Long-term loan has a maturity period longer than seven years but not exceeding a maximum
period of fifteen years.

Commercial Bank |

Applicants for medium or long term loan must submit detailed project feasibility study or
business plan and must contribute at least 30% of the total project cost.
f. Auto and finance activity

Export Finance:
Like import finance DBL advances in export trade at both pre and post shipment stages. In this
type of advance, standing of both opener and beneficiary of export L/C as well as standing of the
L/C issuing bank are of important consideration. The pre-shipment facilities are usually required
to finance the costs to execute export orders, such as: procuring & processing of raw materials,
packaging and transportation, payment of various fees and charges including insurance premium.
While post-import facilities are directed to finance exporter’s various requirements, which are
required to be settled immediately on the backdrop that usually, settlement of export proceeds
takes some time to complete.
g. Lease Finance:
These types of finance are made to acquire the assets selected by the borrower (lessee) for hiring
of the same at a certain agreed terms and conditions with the bank (lessor). In this case, bank
retains ownership of the assets and borrower possesses and uses the same on payment of rental as
per contract. In this case, no down payment is required and usually purchase option is not
permitted.
h. Running finance activity
Merchandise loan facility

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It is a short term credit facility extended to customers against merchandise or its documentary
evidence. Like Railway Receipts, Warehouse Receipts, Airway Bills.
Merchandise loan facility is extended to customers for a maximum period of one year and its
maximum advance rate is 80% of the amount of the merchandise.

3. Payment operations
a. Banks also serve often under-appreciated roles as payment agents within a country and
between nations.
The development of retail services for private individuals is one of the priority directions of
Bank’s strategic development.

Commercial Bank |

All types of services offered were formed under the needs of clients. Among them are
CONTACT - the money transfer and payment system, deposit services for different groups of
population and others.
The Bank provides the following services for individuals:
- Cash and settlement service
- Money transfers service via CONTACT system
- Plastic card and payment document operations
- Securities trading
- Depository services
- Safe deposit boxes
- Precious metals operations
- Term deposits
- Consumer crediting
Not only do banks issue debit cards that allow account holders to pay for goods with the swipe
of a card, they can also arrange wire transfers with other institutions.
b. Banks essentially underwrite financial transactions by lending their reputation and
credibility to the transaction.
Conventional banking uses the term "underwriting" to describe the analysis of a borrower's
ability to pay. For a private citizen, this will typically involve a credit report, financial
statements, and details regarding employment and salary. This is an example of underwriting that
should be familiar to most people. In the case of a real estate transaction, underwriting may
involve
the
property
itself
being
brought
into
scrutiny.
A check is basically just a promissory note between two people, but without a bank's name and
information on that note, no merchant would accept it. As payment agents, banks make
commercial transactions much more convenient; it is not necessary to carry around large

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amounts of physical currency when merchants will accept the checks, debit cards or credit cards
that banks provide.

IV.

Commercial bank system in Vietnam

1. Overview
Over the past decade, along with the process of innovation and integration, commercial banking
system in Vietnam has many important changes. The appearance of the bank with 100% foreign
capital and the gradual removal of restrictions on the operation of bank branches has caused the
level of competition becoming increasingly fierce and forced the banks to restructure their
organization. Within 2 years, 2 out of 5 state-owned commercial banks have made formal
equalization and operated under multi-ownership model. The joint-stock commercial banks are
restructured with the participation of the foreign investment’s strategy to increase its chartered
capital to a minimum of 3,000 billion VND.

Commercial Bank |

In recent years, commercial banking system in Vietnam has contributed significantly to
innovation and promotion of our economy and accelerated the process of industrialization –
modernization. Commercial banks not only play an important role in the economy as a channel
capital but also help stabilize the purchasing power of money. Along with the reform and
innovation, the number of commercial bank has grown rapidly and shifted gradually towards a
compatible system of the emerging and developing economy.
The growth of the banking system reflected in the increase in equity , total assets , the level of
diversification of supply and services contributing to GDP every year : the total registered
capital has increased by 12 times , total assets and deposits rose by 16 times and loans went up
by 14 times.

Compared to the end of the month 11/2013, the total assets of the banking system soared more
than 240 trillion. In particular, the total assets of the state-owned commercial banking group

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Commercial Bank |

reached 2504.87 trillion, which was more than 110 trillion compared to the end 11/2013; jointstock commercial bank increased by 100 trillion to reach 2463.44 billion

Until 31/12/2013, the total chartered capital of the banking system reached 423.98 trillion,
increasing by 5.285 billion compared with the end of the month 11/2013
In particular, the chartered capital of State-owned commercial banks (Vietcombank, Vietinbank,
BID, etc.) reached 128.09 trillion. Total assets of joint-stock commercial banks (ACB,
Sacombank, Techcombank, etc.) reached 193.53 trillion, which was more than 5.260 billion
compared to that figure at the end of March 11/2013.
All these figures are real evidences of the important of commercial banks to the banking
systems as well as the whole economy.

2. The real situation of commercial banks in Vietnam recently
- In the latest news, a lot of commercial banks have reported loss for 2013. The Asia
Commercial Bank (ACB), one of the Vietnamese biggest banks, has reported the loss of
VND293 billion in the fourth quarter of 2013.

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Commercial Bank |

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Eximbank has for the first time since 2009, when it began listing shares on the bourse,
reported the loss of VND222 billion in the fourth quarter of 2013.
Other banks luckily did not take a loss, but have reported the sharp falls in profits.
Vietinbank, for example, saw the profit down by 60 percent in the fourth quarter of 2013,
while the Military Bank saw the non-performing loan ratio increasing by 50 percent and
the profit decreases in all types of business.
SHB’s profit in the fourth quarter decreased by 70 percent, while Techcombank has
estimated the 13.7 percent decrease in the 2013’s profit in comparison with the year
before.
SBV has the plan to cut down the number of Vietnamese commercial banks to 14-17 in
the next three years as stated by some high ranking officials, Governor of the State Bank
of Vietnam Nguyen Van Binh said the State Bank believes the number (14-17 banks) fits
the Vietnam’s national economy’s scale.
Economists some years ago raised a question that if Vietnam, a small economy, needed so
many commercial banks and if it was necessary for the State Bank to stop licensing more
banks.
The number of commercial banks is not the cause of the commercial banking system
restructure. The objective of commercial banking system restructuring is clear, that is to
improve service quality. There are objective and subjective causes that lead to these
obstacles which include loose management of real estate, ineffective management of state
economic groups and local infrastructure projects, high inflation, and high interest rate.
In addition, commercial banks’ control of credit quota has resulted in lack of loan for
business investment.

3. Some solutions for the situation:
- Commercial banks strengthen administration and operation, review and complete internal
stipulations, develop clear and suitable operation and business strategies, refrain from
large investment in high-risk areas like security and real estate, enhance internal auditing,
ensure independence and improve efficiency of internal control and supervision.
- State regulatory offices promulgate policies on management of commercial banks to
control risks and challenges before they occur and strengthen monitoring and supervision.
- Bad debts relating to state economic groups in commercial banks should be liquidated.
- Experiences and lessons should be drawn from the first restructure of commercial banks
which had several similar causes, namely” financial and monetary crisis, heated
development of estate market and particularly management and operation capacity.

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V.

Conclusion

Commercial banks perform the vital role of bringing together those economic agents with
surplus funds who want to lend, with those with a shortage of funds who want to borrow.

Commercial Bank |

In the modern word, commercial banks are not merely as financial intermediaries but also the
leaders in economic development.

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