Credit quality improvement at acledabank plc
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MININSTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS OF HO CHI MINH CITY
CHHUON CHHEN
CREDIT QUALITY IMPROVEMENT
AT ACLEDABANK PLC
MASTER OF BANKING THESIS
Ho Chi Minh City – 2012
MININSTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS OF HO CHI MINH CITY
CHHUON CHHEN
CREDIT QUALITY IMPROVEMENT
AT ACLEDABANK PLC
Major: Banking
Major code: 60.31.12
MASTER OF BANKING THESIS
Ho Chi Minh City – 2012
Acknowledgements
First of all I would like to express my sincere gratitude to my supervisors, Dr.
PHAM VAN NANG at University of Economics Ho Chi Minh City, Vietnam, for
his intelligent guidance and helpful advice during the whole process.
I would like to thank all the participants who contributed to my work, not just for
their responses, but also for the good suggestions they made and their kind help.
Special thanks to my family and friends for their consideration and support during
all the process of writing this thesis.
CHHUON CHHEN
I
Table of Content
INTRODUCTION ............................................................................................................... 1
1. URGENCY OF THE SUBJECT....................................................................................... 1
2. Research Objectives .......................................................................................................... 2
3. Object and Scope of the research ...................................................................................... 2
4. Research Methodology...................................................................................................... 2
5. Contribution of the study .................................................................................................. 2
6. Outline of the study ........................................................................................................... 2
CHAPTER I: CREDIT QUALITY OF COMMERCIAL BANK................................... 3
1.1. Credit activities of commercial bank .............................................................................. 3
1.1.1. Overview of commercial bank ..................................................................................... 3
1.1.1.1. Definition of commercial bank ................................................................................. 3
1.1.1.2. Major activities of commercial bank ........................................................................ 4
1.1.1.2.1. Mobilization of capital ........................................................................................... 4
1.1.1.2.2. Capital Use ............................................................................................................. 6
1.1.1.2.3. Other activities..................................................................................................... 6
1.1.2. Credit activities of commercial bank ...................................................................... 6
1.1.2.1. Definition of credit activities ............................................................................... 6
1.1.2.2. Forms of credit of commercial banks .................................................................. 7
1.1.2.2.1. Based on purpose ................................................................................................. 7
1.1.2.2.2. Based on credit term. ........................................................................................... 8
1.1.2.2.3. Based on the mode of lending ............................................................................. 8
1.1.2.2.4. Based on the level of confidence for customers ................................................ 10
1.1.2.2.5. Based on the origin of credit: ............................................................................ 10
1.1.2.2.6. Based on morphological value of credit ............................................................ 11
1.2. Credit quality of commercial bank ............................................................................... 11
1.2.1.Definition of credit quality ......................................................................................... 11
1.2.2.The important to improve credit efficiency ................................................................ 12
1.2.2.1.For banks.................................................................................................................. 12
1.2.2.2. For customers .................................................................................................... 13
1.2.2.3. For economic development ............................................................................... 14
1.2.3. Factors used to analyze credit quality ............................................................... 14
1.2.3.1. Qualitative factors ............................................................................................. 14
II
1.2.3.2. Quantitative factors ........................................................................................... 15
1.2.3.2.1. Debt outstanding growth rate ............................................................................ 15
1.2.3.2.2. Past due debt/Total debt outstanding ratio ........................................................ 15
1.2.3.2.4. Mortgage loan/Total loan outstanding............................................................... 16
1.2.3.2.5. The growth rate of income from credit activities .............................................. 16
1.3. Factors affecting credit quality of commercial banks ....................................... 17
1.3.1. Subjective Factors ............................................................................................. 17
1.3.2. Objective Factors .............................................................................................. 19
CHAPTER II: THE REALITY OF CREDIT QUALITY OF ACLEDA BANK PLC23
2.1. Overview of ACLEDA BANK PLC ........................................................................ 23
2.1.1. History of development ......................................................................................... 23
2.1.2. Management structure of ACLEDA BANK PLC ................................................. 26
2.1.3. Result of its activities……………………………………………………………32
2.1.3.1. Capital mobilization………………..…………………..………………………32
2.1.3.2. Lending and investment .................................................................................... 36
2.1.2.3. Other business activities .................................................................................... 37
2.1.2.4. Business Result .................................................................................................. 38
2.2. Credit quality of ACLEDA BANK PLC .................................................................. 39
2.2.1. Lending process .................................................................................................... 39
2.2.2. Analyzing factors reflecting credit quality of ACLEDA BANK PLC ................. 41
2.2.2.1. The growth of debt balance ............................................................................... 41
2.2.2.2. Past due .............................................................................................................. 44
2.2.2.3. Past due divided in groups ................................................................................. 45
2.2.2.4. Mortgage loan .................................................................................................... 48
2.2.2.5. The growth of interest income ........................................................................... 51
2.3. Credit quality analysis .............................................................................................. 52
2.3.1. Business outcome .................................................................................................. 52
2.3.2. Limitation and causes ............................................................................................ 54
2.3.2.1. Limitation .......................................................................................................... 54
2.3.2.2. Causes ................................................................................................................ 54
2.3.2.2.1. Subjective Causes .............................................................................................. 54
2.3.2.2.2. Objective cause .................................................................................................. 56
CHAPTER III: SOLUTION TO IMPROVE CREDIT QUALITYOF ACLEDA
BANK PLC ……………………………………………………………………………..59
III
3.1. The orientation of credit activities of ACLEDA BANK PLC .................................. 59
3.1.1. Business orientation of ACLEDA Bank Plc: ........................................................ 59
3.1.2. The orientation of credit development of ACLEDA BANK PLC ........................ 60
3.2. The solution to improve credit quality of ACLEDA BANK PLC ........................... 61
3.2.1. Credit assessment improvement ............................................................................ 61
3.2.2. Improvement of credit risk control ....................................................................... 62
3.2.3. Increasing cover ratio( collateral/debt ratio) ......................................................... 63
3.2.4. Enhance the settlement of outstanding debt .......................................................... 64
3.2.5. Development of human resource .......................................................................... 65
3.2.6. Update technology ................................................................................................ 67
3.2.7. Maintain long term relationship with customers ................................................... 68
3.2.8. Improvement of Marketing quality ....................................................................... 69
3.2.9. Other solution ........................................................................................................ 70
3.2.9.1. Conduct contests to find out high quality staffs ................................................ 70
3.2.9.2. Organize seminars and exchange experiences with other banks ....................... 70
3.2.9.3. Separate clearly between salaries and bonuses ................................................. 71
3.2.9.4. Promote good relationship between the bank and other authorities .................. 71
3.3. Petition ...................................................................................................................... 71
3.3.1. For the government ............................................................................................... 71
3.3.1.1. Strengthening the supervision of law enforcement ........................................... 71
3.3.1.2. Conducting equalization and restructuring the state enterprises ....................... 71
3.3.1.3. Further promoting the operations of debt and asset trading companies ............ 72
3.3.1.4. Urgently granting land/house title deed to people ............................................. 72
3.3.1.5. Fastening the process of issue settlement of the court system .......................... 72
3.3.2. For National Bank of Cambodia ........................................................................... 72
3.3.2.1. Stabilizing the inter-banking money market quickly. ....................................... 72
3.3.2.2. Strengthening the inspection and supervision of the operation of commercial
banks…….. .......................................................................................................................... 73
CONCLUSION .................................................................................................................... 74
REFERENCES .................................................................................................................... 75
IV
List of Tables
Table 2.1: The situation of ACLEDA Bank’s capital mobilization………..………32
Table 2.2: Capital mobilization by maturity date…………………………….……35
Table 2.3: Lending and investment of ACLEDA Bank…………………….……...36
Table 2.4: Business result of ACLEDA Bank...…………………………...……... 38
Table 2.5: Lending situation of ACLEDA Bank…………………………………..43
Table 2.6: Past due debt of ACLEDA Bank……………………………………….44
Table 2.7: Past due debt divided in group of ACLEDA Bank………….…………46
Table 2.8: Percentage secured past due loan of ACLEDA Bank……….…………50
Table 2.9: Total net interest income of ACLEDA Bank…………………….…….51
V
List of Chart
Chart 2.1: The situation of ACLEDA Bank’s capital mobilization ………….……33
Chart 2.2: Capital mobilization by maturity date ………………………………… 35
Chart 2.3: Lending and investment of ACLEDA Bank ………………………….. 37
Chart 2.4: Business result of ACLEDA Bank ………………………………….... 38
Chart 2.5: Lending situation of ACLEDA Bank …………………………..…….. 43
Chart 2.6: Past due debt of ACLEDA Bank…………………………….……..…. 44
Chart 2.7: Past due debt divided in group of ACLEDA Bank ………………..… 47
Chart 2.8: Percentage secured past due loan of ACLEDA Bank …………..…..… 49
Chart 2.9: Total net interest income of ACLEDA Bank …………………..……... 52
VI
Page 1
INTRODUCTION
1. URGENCY OF THE SUBJECT
Today the role of banks in general and commercial banks in particular are
increasingly evident, contributing to the development of world economy in general
and in particular to contribute to the economic development of Cambodia.
ACLEDA bank is one of the commercial banks of Cambodia. Currently, the main
business activities of commercial banks in general and of ACLEDA bank in
particular are: Capital raising activities, Capital using activities, and other services.
Among these activities, credit activities is a basic activity and plays an important
role for ACLEDA bank, such as: This activity provides the main source of revenue
for ACLEDA, and through this activity, it may do cross-selling products to attract
other activities such as underwriting, international payment, money
transfer...However, the credit quality of ACLEDA is still being evaluated to be low.
This will cause many risks (such as credit risk, liquidity risk...) and losses to the
bank.
In the context of the global financial crisis, the fierce competition among
commercial banks with other banks has made credit quality of ACLEDA somewhat
diminished.
To develop credit activities in particular and banking activities in general,
improvement the credit quality in the future is an urgent requirement in place today.
Because of the above requirement, the topic: “The solution to improve credit quality
of ACLEDA bank.” was chosen as the subject of Master thesis in economics.
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2. Research Objectives
- Study the basic theories about the credit quality of commercial banks.
- Analyze the status of credit quality of ACLEDA BANK PLC in Cambodia, then
point out what has been done and what has not yet been done and point out the
causes of these limitations.
- Propose the solutions to improve the credit quality of the ACLEDA BANK in the
future.
3. Object and Scope of the research
- Study objects: the credit quality of commercial banks.
- Scope of the Study: Credit quality of ACLEDA BANK in Cambodia.
- Research Time: From 2009 to 2011.
4. Research Methodology
In the process of writing thesis, statistical methods, synthesis, investigation,
comparison and economic analysis are used.
5. Contribution of the study
- Systematize the basic arguments of credit quality of commercial bank.
- Analyze the status of credit quality of ACLEDA BANK, then point out the
solutions to improve its credit quality.
6. Outline of the study
Introduction
Chapter 1: Credit quality of commercial bank
Chapter 2: The reality of credit quality of ACLEDA BANK PLC.
Chapter 3: Solutions to improve credit quality of ACLEDA BANK PLC
Conclusion
Page 3
CHAPTER I
CREDIT QUALITY OF COMMERCIAL BANK
1.1. Credit activities of commercial bank
1.1.1. Overview of commercial bank
1.1.1.1. Definition of commercial bank
Today, the commercial banking system has become one of the most important
financial institutions which contribute mainly to the economic development of the
country in general and of the entire economy in particular. When researching a bank
in every different angle, we will have different concepts of the respective
commercial banks, in particular:
In the U.S., commercial banks can be interpreted as: "Any organization that
provides deposit accounts and allow customers to withdraw money on demand
(such as by writing checks or using electronic funds withdrawal) and offer loans to
business organizations or commercial lending will be considered a bank."
But to distinguish commercial banks with other non-bank financial institutions, the
Federal Reserve has provided that "lending to individuals and households is also
one of typical banking activities to differentiate banks with other financial
institutions." Congress has added to its provisions, under which "the bank is defined
as a company that is a member of the federal deposit insurance company."
In Vietnam, the commercial banks can be interpreted as: "Commercial banks are a
form of credit institution which made the whole banking activities and other related
activities. (well according to this law, the credit institution is the type of enterprises
established under the provisions of this law and other regulations of law for
monetary operations, doing banking services with regular content is to receive
deposits and use the money to provide credit and payment services). "
Page 4
In Cambodia, in the past, the banking system was a one-tier banking system which
has the duty of the issuing bank and also performing currency trading. Response to
the requirements of economy innovation, the banking system in Cambodia has been
converted into two-tier banking system. All commercial banks were established and
operating under the regulatory control of the ordinances of the National Bank of
Cambodia. According to the law of credit institutions in Cambodia, the commercial
banks could be interpreted as follows: "The commercial bank is the type of credit
institutions performing all banking activities and other relevant business activities
for the target of profit, thus contributing to the economic objectives of the
government."
1.1.1.2. Major activities of commercial bank
Activity of commercial banks is a special type of activity, such as currency trading
with two main functions of making money and currencies trading aiming at
bringing profit to banks and contributing to the overall development of society. The
principal activities of commercial banks include:
1.1.1.2.1. Mobilization of capital
Business activities of commercial banks are operating in the monetary field. With
the purpose to meet the capital needs of customers, apart from the owner’s equity of
banks, commercial banks conducting mobilization of temporarily idle funds in the
economy under different forms to supplement the business capital of the bank. The
mobilization can be done mostly in forms such as:
- Contributed capital: When commercial bank was established, it usually has a
certain level of capital; this capital is called charter capital. However, during the
operation, it needs to expand business operations; commercial banks can raise
additional funds added to the charter capital to strengthen the bank's business
capital.
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- Source of deposit: This is the main source of money to supplement the business
capital of the bank because the bank's operation is the intermediate between the
people who has the excess of money and people who lack of money for
production, doing business and consumption, and it is the basis of loans to be
profitable and the development of the bank. Customers deposit to banks with a
lot of different purposes or to save or to make payment, depending on the
purpose of customers, banks have the forms of mobilization, such as transaction
deposits, non- transaction deposit.
• Transaction deposit: this is one of the most volatile funds, term of transaction
deposits is very short and because it can be withdrawn at any time without
prior notice. Transaction deposits include deposits for issuing checks,
collection, payment...
• Non- transactions deposits: This is the nature of deposits of depositors'
savings, this kind of deposit usually has longer term and more stable nature,
this is an important source of cash for commercial banks to implement its
business. However, the interest rate of this type of deposits is higher than
transaction deposit.
- Loans from central banks and other credit institutions:
The central bank is a bank of all banks, as the last lender of all credit institutions
in case they do not have enough liquidity. In this case, the commercial banks
borrow money to fill the gap, to ensure liquidity in case of necessity. The
mobilization of capital with a reasonable cost and structure will contribute to the
business performance of a bank. Also when necessary for immediate liquidity,
commercial banks can borrow from other commercial banks to meet their
immediate liquidity.
In addition, commercial banks can also raise capital through the issuance of
debentures, savings bonds, certificates of deposit ... this is also an important
source of money to supplement business capital of the bank.
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1.1.1.2.2. Capital Use
After the establishment of a bank, with its own funds and through capital raising
activities, the bank will have certain capital to do its business. Then banks will plan
to use that capital to be rational and most effective, the major capital use activities
of commercial banks are lending activities, investment activities, guarantee
activities ... then commercial banks will gain a certain amount of interest to offset
the expenses of bank such as deposits, reserve costs, business expenses,
management costs ... and the excess called the profits from business activities of
banks. When economy develops, the demand for capital use increases, businesses
and individuals will come to the bank to find a financial prop so they can
supplement capital to their business to improve profitability and vice versa.
1.1.1.2.3. Other activities
In addition to the above lending and investment activities, the banking business also
include other activities such as local and international payment activities, money
transfer, collection, guarantee and provide information about business, investment
and corporate governance, financial management, financial consultancy, project,
asset management, foreign currency business ... the business was conducted under
the authorization of the customer based on customer payment accounts at the bank.
In countries where financial market develops, these business activities are the array
of services to bring greater revenues for commercial banks. On the other hand,
when these services develop, it will meet the growing needs of customers and fulfill
the needs of the economy development.
1.1.2. Credit activities of commercial bank
1.1.2.1. Definition of credit activities
Credit activity is a basic activity and brings major source of income for commercial
banks in developing countries and less developed countries. The term “Lending” is
understood as: "Lending is a form of credit, which credit institutions offer to
customers to use a sum of money for certain purpose and time period as agreed with
Page 7
the principle of repayment of principal and interest." Therefore, the nature of the
credit relationship is the lending- borrowing relationship with the repayment of the
principal and a surplus called interest after a certain time, or it is also a relationship
of right transfer of capital use to bring profit to all parties.
Under Cambodian Credit Law, the bank credits can be understood as follows:
"Credit by commercial banks is a relationship of cash or asset transaction between
banks and customers, in which banks offer cash or asset to customers to use in a
certain time and customers have the right to use the money, the asset with the
obligation to return the principal and add a surplus called the interest when due."
When banks have strong financial resources, and mobilize more capital, banks are
always looking for investment opportunities, lending to customers to use up the
banks’ capital to obtain the largest profit. Bank credit not only meets short-term
working capital need for the economic organization or individual, but also meets
both long-term capital need of the customer. Thus, bank credit is increasingly
becoming an important activity and is indispensable in the market economy,
especially for poor countries and developing countries including Cambodia.
1.1.2.2. Forms of credit of commercial banks
1.1.2.2.1. Based on purpose
- Real estate loans: Include short-term construction and ground clearance as well
as long-term loan financing for the purchase of farmland, houses, and
commercial centers and buying foreign asset. For these types of loans, the bank
was secured by the real property: land, buildings and other facilities.
- Lending to financial institutions: Including credits for banks, insurance
companies, finance companies and other financial institutions.
- Loans to industrial and commercial businesses: It helps cover costs such as
purchasing, warehousing, pay taxes, pay for officials and employees.
Page 8
- Loans to agriculture: It supports farmers in planting operations, harvesting and
storage products.
- Lending to individuals: to help finance the purchase of automobiles, housing,
household equipment, construction materials to repair and modernize their homes
or grant to cover the individual expenses.
- Other loans: Include loans not included in the above loans and loan for doing
business in securities
1.1.2.2.2. Based on credit term.
- Short-term loans: loans with a term of up to 12 months, as determined in
accordance with the cycle of production, sales and repayment capacity of clients.
- Medium, long-term loans: Loan that is determined mainly for investment
purchases of fixed assets, renovation of equipment, technology, business
expansion, construction of the project with the large scale of capital recovery.
These types of loans are increasingly focused by banks to develop, on the one
hand they meet the needs of business loans, and on the other hand they are also
consistent with the possibility of capital by commercial banks. Medium-term is
considered from 12 months to 60 months, long-term is considered from and
above 60 months but not exceeding the remaining operation period according to
the decision of establishment or establishment license for legal entities and not
more than 15 years for lending to investment projects.
1.1.2.2.3. Based on the mode of lending
- Each-time loan: At each time of borrowing, customer and the bank carry out the
necessary procedures for loans and credit contracts. This method applies to
customers whose borrowing needs are not regular, unstable production, a
seasonal business.
Page 9
- Loans under the credit contract: the bank and the customer identified, agreed
upon a line of credit maintained for a certain period or cycle of production and
business.
- Project loans: Banks lend to borrowers to make investments to develop
production, business, and service and investment projects.
- Syndicated lending: a group of credit institutions lends to a project loan of one
customer, in which a credit institution as a focal point arrangement, and
coordinate with other credit institutions. Otherwise, the syndicated loan must also
comply with the regulation of co-financing of credit institutions issued by the
State Bank. A syndicated loan has the advantage of sharing the risk, but the
disadvantage is loosening the control of customers.
- Installment loans: When lending, banks and customers identify and agree to pay
the loan interest plus principal which is divided into various terms of repayment
of the loan term.
- Business loans through the issuance and use of credit cards: Credit institutions
approved the customer to use the loan within the credit limit to pay for goods and
services and withdraw cash at automated teller machines or cash advance agency
of the credit institutions. When lending through the issuance and use of credit
card, credit institutions and customers must comply with the provisions of the
Government and the State Bank on the issuance and use of credit cards.
- Credit limit: Bank and customer identify and agree on a line of credit maintained
for a certain period of time. The lending and debt collection mix together. This
method applies to customers wishing to pay the regular loan, the business
situation is stable, fast capital turnover and have confidence in the credit
relationship.
- Overdraft limit: The credit institution has a written approval to customers, allow
customers to spend more than the amount of money in the current account of
customers in accordance with the provisions of the Government and State Bank
on payment activities through organizations providing payment services.
Page 10
- Provision credit limit: Credit institutions are committed to ensuring available to
borrowers within a certain credit limit. Credit institutions and customers agree on
period of validity of the provision credit limit, the fee payable to the provision
credit limit...
1.1.2.2.4. Based on the level of confidence for customers
- Unsecured loan: Loan with no mortgage/pledge or no guarantee by a third
person. Lending is based solely on their own customers’ credibility. Bank does
not hold a borrower's assets to liquidate to recover the loans when they violate
the contract, but instead are the conditions: the business plan is assessed by the
bank to have feasibility, likely to bring higher profits; business enterprises must
be profitable for two consecutive years at the time of borrowing. Customers are
good customers, honesty in business, a sound financial capability, efficient
management. Then, banks rely on the reputation of customers without additional
sources of debt collection.
- Secured loan: Loan which banks hold the assets owned directly by the borrower
or the property of the guarantor. The common forms of security are: mortgage,
pledge or guarantee. The purpose of this is that when there are any violations of
the loan agreement, the bank has the right to liquidate the property to recover the
loan. This guarantee is the legal basis for banks to have an extra source of second
income supplement for the first debt uncertainty. The secured properties here are
often the real estate property owned by the borrower which the transaction is
allowed, there is no dispute, and the property is insured under the law.
1.1.2.2.5. Based on the origin of credit:
- Direct Lending: Bank finance directly to customers who have needs, and the
borrowers repay the loan directly to bank.
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- Indirect Lending: Loans are made through the acquisition of the debt agreements
or documents and also in the billing period. These forms include: discount, buy
back invoices of sales, business liquidation.
1.1.2.2.6. Based on morphological value of credit
- Loan in form of money: a type of loan supplied by money. This is a form of
bank’s main lending and made by different techniques such as advance lending,
overdrafts, seasonal lending, and installment loan.
- Loan in form of assets: Lending in form of property is very popular and diverse.
The most typical lending is lease-purchase financing. By this method the bank or
leasing company (a subsidiary of the Bank) provides assets directly to customers
and the customers repay principal and interest periodically.
1.2. Credit quality of commercial bank
1.2.1. Definition of credit quality
To understand the credit quality, we start from the quality of goods and services in
general. So, in general, the quality of goods and services is the quality for
customers, it is the one among factors that attract customers. Thus, just as the
quality of goods and services in general, credit quality is vital to the operation of
commercial banks because credit quality reflects the ability of borrowers’ timely
repayment to the banks. So, in different viewpoints, we have different
understandings about the credit quality of commercial banks.
From the viewpoint of the bank: The bank's credit is considered as it has quality
when the bank can recover debts and it brings profit for the bank. Therefore, before
approving loan to customers, the bank must clearly assess the customers in all areas
of loans and, at the same time, calculating lending interest rates reasonably to bring
income to the bank.
Page 12
From the client side: A credit is considered as it has quality when it timely satisfies
the customers’ capital deficiency with reasonable interest rates, fast process and it is
convenient for customers to use the loan and bring higher profits to customers.
Thus, credit quality decides the recoverability of principal and interest, limiting the
possible risks to the banks. Therefore, credit quality has great impact on business
results of the banks. Credit quality not only ensures safety for the operation of each
individual bank, but it also ensures safety for the overall banking system. Thus, in
each of different viewpoints, we have different opinions about credit quality, but for
the author's opinion, the credit quality is defined: "Credit quality is a timely and
reasonably response of customer’s capital demand in accordance with the
provisions of current laws with reasonable cost, ensuring the safe and efficient
development of banks and promote the economy development ".
1.2.2. The important to improve credit efficiency
1.2.2.1. For banks
Currently, in the LDCs and other developing countries in general and in particular
Cambodia, credit operations bring major profit for banks. Thus, in addition to
investment activities and other services, lending activities ensure greater income
(from 70% to 90%) for banks to offset the cost that banks have to spend in
operation. So the bank wants to increase the income they must pay attention to
credit operations. High credit quality will create conditions for banks to increase
revenue, to be safe for credit activity and to be a basis for bank’s credit expansion.
A sustainable expansion will make stable growth for banks. Especially today, when
the economic crisis is going global and increasingly fierce competition in the
financial markets, banks must pay attention to credit quality problems parallel to the
continuous scale of credit growth. Thus, for banks, improving credit quality will
have the effect that:
UNIVERSITY OF ECONOMICS OF HO CHI MINH CITY
CHHUON CHHEN
CREDIT QUALITY IMPROVEMENT
AT ACLEDABANK PLC
MASTER OF BANKING THESIS
Ho Chi Minh City – 2012
MININSTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS OF HO CHI MINH CITY
CHHUON CHHEN
CREDIT QUALITY IMPROVEMENT
AT ACLEDABANK PLC
Major: Banking
Major code: 60.31.12
MASTER OF BANKING THESIS
Ho Chi Minh City – 2012
Acknowledgements
First of all I would like to express my sincere gratitude to my supervisors, Dr.
PHAM VAN NANG at University of Economics Ho Chi Minh City, Vietnam, for
his intelligent guidance and helpful advice during the whole process.
I would like to thank all the participants who contributed to my work, not just for
their responses, but also for the good suggestions they made and their kind help.
Special thanks to my family and friends for their consideration and support during
all the process of writing this thesis.
CHHUON CHHEN
I
Table of Content
INTRODUCTION ............................................................................................................... 1
1. URGENCY OF THE SUBJECT....................................................................................... 1
2. Research Objectives .......................................................................................................... 2
3. Object and Scope of the research ...................................................................................... 2
4. Research Methodology...................................................................................................... 2
5. Contribution of the study .................................................................................................. 2
6. Outline of the study ........................................................................................................... 2
CHAPTER I: CREDIT QUALITY OF COMMERCIAL BANK................................... 3
1.1. Credit activities of commercial bank .............................................................................. 3
1.1.1. Overview of commercial bank ..................................................................................... 3
1.1.1.1. Definition of commercial bank ................................................................................. 3
1.1.1.2. Major activities of commercial bank ........................................................................ 4
1.1.1.2.1. Mobilization of capital ........................................................................................... 4
1.1.1.2.2. Capital Use ............................................................................................................. 6
1.1.1.2.3. Other activities..................................................................................................... 6
1.1.2. Credit activities of commercial bank ...................................................................... 6
1.1.2.1. Definition of credit activities ............................................................................... 6
1.1.2.2. Forms of credit of commercial banks .................................................................. 7
1.1.2.2.1. Based on purpose ................................................................................................. 7
1.1.2.2.2. Based on credit term. ........................................................................................... 8
1.1.2.2.3. Based on the mode of lending ............................................................................. 8
1.1.2.2.4. Based on the level of confidence for customers ................................................ 10
1.1.2.2.5. Based on the origin of credit: ............................................................................ 10
1.1.2.2.6. Based on morphological value of credit ............................................................ 11
1.2. Credit quality of commercial bank ............................................................................... 11
1.2.1.Definition of credit quality ......................................................................................... 11
1.2.2.The important to improve credit efficiency ................................................................ 12
1.2.2.1.For banks.................................................................................................................. 12
1.2.2.2. For customers .................................................................................................... 13
1.2.2.3. For economic development ............................................................................... 14
1.2.3. Factors used to analyze credit quality ............................................................... 14
1.2.3.1. Qualitative factors ............................................................................................. 14
II
1.2.3.2. Quantitative factors ........................................................................................... 15
1.2.3.2.1. Debt outstanding growth rate ............................................................................ 15
1.2.3.2.2. Past due debt/Total debt outstanding ratio ........................................................ 15
1.2.3.2.4. Mortgage loan/Total loan outstanding............................................................... 16
1.2.3.2.5. The growth rate of income from credit activities .............................................. 16
1.3. Factors affecting credit quality of commercial banks ....................................... 17
1.3.1. Subjective Factors ............................................................................................. 17
1.3.2. Objective Factors .............................................................................................. 19
CHAPTER II: THE REALITY OF CREDIT QUALITY OF ACLEDA BANK PLC23
2.1. Overview of ACLEDA BANK PLC ........................................................................ 23
2.1.1. History of development ......................................................................................... 23
2.1.2. Management structure of ACLEDA BANK PLC ................................................. 26
2.1.3. Result of its activities……………………………………………………………32
2.1.3.1. Capital mobilization………………..…………………..………………………32
2.1.3.2. Lending and investment .................................................................................... 36
2.1.2.3. Other business activities .................................................................................... 37
2.1.2.4. Business Result .................................................................................................. 38
2.2. Credit quality of ACLEDA BANK PLC .................................................................. 39
2.2.1. Lending process .................................................................................................... 39
2.2.2. Analyzing factors reflecting credit quality of ACLEDA BANK PLC ................. 41
2.2.2.1. The growth of debt balance ............................................................................... 41
2.2.2.2. Past due .............................................................................................................. 44
2.2.2.3. Past due divided in groups ................................................................................. 45
2.2.2.4. Mortgage loan .................................................................................................... 48
2.2.2.5. The growth of interest income ........................................................................... 51
2.3. Credit quality analysis .............................................................................................. 52
2.3.1. Business outcome .................................................................................................. 52
2.3.2. Limitation and causes ............................................................................................ 54
2.3.2.1. Limitation .......................................................................................................... 54
2.3.2.2. Causes ................................................................................................................ 54
2.3.2.2.1. Subjective Causes .............................................................................................. 54
2.3.2.2.2. Objective cause .................................................................................................. 56
CHAPTER III: SOLUTION TO IMPROVE CREDIT QUALITYOF ACLEDA
BANK PLC ……………………………………………………………………………..59
III
3.1. The orientation of credit activities of ACLEDA BANK PLC .................................. 59
3.1.1. Business orientation of ACLEDA Bank Plc: ........................................................ 59
3.1.2. The orientation of credit development of ACLEDA BANK PLC ........................ 60
3.2. The solution to improve credit quality of ACLEDA BANK PLC ........................... 61
3.2.1. Credit assessment improvement ............................................................................ 61
3.2.2. Improvement of credit risk control ....................................................................... 62
3.2.3. Increasing cover ratio( collateral/debt ratio) ......................................................... 63
3.2.4. Enhance the settlement of outstanding debt .......................................................... 64
3.2.5. Development of human resource .......................................................................... 65
3.2.6. Update technology ................................................................................................ 67
3.2.7. Maintain long term relationship with customers ................................................... 68
3.2.8. Improvement of Marketing quality ....................................................................... 69
3.2.9. Other solution ........................................................................................................ 70
3.2.9.1. Conduct contests to find out high quality staffs ................................................ 70
3.2.9.2. Organize seminars and exchange experiences with other banks ....................... 70
3.2.9.3. Separate clearly between salaries and bonuses ................................................. 71
3.2.9.4. Promote good relationship between the bank and other authorities .................. 71
3.3. Petition ...................................................................................................................... 71
3.3.1. For the government ............................................................................................... 71
3.3.1.1. Strengthening the supervision of law enforcement ........................................... 71
3.3.1.2. Conducting equalization and restructuring the state enterprises ....................... 71
3.3.1.3. Further promoting the operations of debt and asset trading companies ............ 72
3.3.1.4. Urgently granting land/house title deed to people ............................................. 72
3.3.1.5. Fastening the process of issue settlement of the court system .......................... 72
3.3.2. For National Bank of Cambodia ........................................................................... 72
3.3.2.1. Stabilizing the inter-banking money market quickly. ....................................... 72
3.3.2.2. Strengthening the inspection and supervision of the operation of commercial
banks…….. .......................................................................................................................... 73
CONCLUSION .................................................................................................................... 74
REFERENCES .................................................................................................................... 75
IV
List of Tables
Table 2.1: The situation of ACLEDA Bank’s capital mobilization………..………32
Table 2.2: Capital mobilization by maturity date…………………………….……35
Table 2.3: Lending and investment of ACLEDA Bank…………………….……...36
Table 2.4: Business result of ACLEDA Bank...…………………………...……... 38
Table 2.5: Lending situation of ACLEDA Bank…………………………………..43
Table 2.6: Past due debt of ACLEDA Bank……………………………………….44
Table 2.7: Past due debt divided in group of ACLEDA Bank………….…………46
Table 2.8: Percentage secured past due loan of ACLEDA Bank……….…………50
Table 2.9: Total net interest income of ACLEDA Bank…………………….…….51
V
List of Chart
Chart 2.1: The situation of ACLEDA Bank’s capital mobilization ………….……33
Chart 2.2: Capital mobilization by maturity date ………………………………… 35
Chart 2.3: Lending and investment of ACLEDA Bank ………………………….. 37
Chart 2.4: Business result of ACLEDA Bank ………………………………….... 38
Chart 2.5: Lending situation of ACLEDA Bank …………………………..…….. 43
Chart 2.6: Past due debt of ACLEDA Bank…………………………….……..…. 44
Chart 2.7: Past due debt divided in group of ACLEDA Bank ………………..… 47
Chart 2.8: Percentage secured past due loan of ACLEDA Bank …………..…..… 49
Chart 2.9: Total net interest income of ACLEDA Bank …………………..……... 52
VI
Page 1
INTRODUCTION
1. URGENCY OF THE SUBJECT
Today the role of banks in general and commercial banks in particular are
increasingly evident, contributing to the development of world economy in general
and in particular to contribute to the economic development of Cambodia.
ACLEDA bank is one of the commercial banks of Cambodia. Currently, the main
business activities of commercial banks in general and of ACLEDA bank in
particular are: Capital raising activities, Capital using activities, and other services.
Among these activities, credit activities is a basic activity and plays an important
role for ACLEDA bank, such as: This activity provides the main source of revenue
for ACLEDA, and through this activity, it may do cross-selling products to attract
other activities such as underwriting, international payment, money
transfer...However, the credit quality of ACLEDA is still being evaluated to be low.
This will cause many risks (such as credit risk, liquidity risk...) and losses to the
bank.
In the context of the global financial crisis, the fierce competition among
commercial banks with other banks has made credit quality of ACLEDA somewhat
diminished.
To develop credit activities in particular and banking activities in general,
improvement the credit quality in the future is an urgent requirement in place today.
Because of the above requirement, the topic: “The solution to improve credit quality
of ACLEDA bank.” was chosen as the subject of Master thesis in economics.
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2. Research Objectives
- Study the basic theories about the credit quality of commercial banks.
- Analyze the status of credit quality of ACLEDA BANK PLC in Cambodia, then
point out what has been done and what has not yet been done and point out the
causes of these limitations.
- Propose the solutions to improve the credit quality of the ACLEDA BANK in the
future.
3. Object and Scope of the research
- Study objects: the credit quality of commercial banks.
- Scope of the Study: Credit quality of ACLEDA BANK in Cambodia.
- Research Time: From 2009 to 2011.
4. Research Methodology
In the process of writing thesis, statistical methods, synthesis, investigation,
comparison and economic analysis are used.
5. Contribution of the study
- Systematize the basic arguments of credit quality of commercial bank.
- Analyze the status of credit quality of ACLEDA BANK, then point out the
solutions to improve its credit quality.
6. Outline of the study
Introduction
Chapter 1: Credit quality of commercial bank
Chapter 2: The reality of credit quality of ACLEDA BANK PLC.
Chapter 3: Solutions to improve credit quality of ACLEDA BANK PLC
Conclusion
Page 3
CHAPTER I
CREDIT QUALITY OF COMMERCIAL BANK
1.1. Credit activities of commercial bank
1.1.1. Overview of commercial bank
1.1.1.1. Definition of commercial bank
Today, the commercial banking system has become one of the most important
financial institutions which contribute mainly to the economic development of the
country in general and of the entire economy in particular. When researching a bank
in every different angle, we will have different concepts of the respective
commercial banks, in particular:
In the U.S., commercial banks can be interpreted as: "Any organization that
provides deposit accounts and allow customers to withdraw money on demand
(such as by writing checks or using electronic funds withdrawal) and offer loans to
business organizations or commercial lending will be considered a bank."
But to distinguish commercial banks with other non-bank financial institutions, the
Federal Reserve has provided that "lending to individuals and households is also
one of typical banking activities to differentiate banks with other financial
institutions." Congress has added to its provisions, under which "the bank is defined
as a company that is a member of the federal deposit insurance company."
In Vietnam, the commercial banks can be interpreted as: "Commercial banks are a
form of credit institution which made the whole banking activities and other related
activities. (well according to this law, the credit institution is the type of enterprises
established under the provisions of this law and other regulations of law for
monetary operations, doing banking services with regular content is to receive
deposits and use the money to provide credit and payment services). "
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In Cambodia, in the past, the banking system was a one-tier banking system which
has the duty of the issuing bank and also performing currency trading. Response to
the requirements of economy innovation, the banking system in Cambodia has been
converted into two-tier banking system. All commercial banks were established and
operating under the regulatory control of the ordinances of the National Bank of
Cambodia. According to the law of credit institutions in Cambodia, the commercial
banks could be interpreted as follows: "The commercial bank is the type of credit
institutions performing all banking activities and other relevant business activities
for the target of profit, thus contributing to the economic objectives of the
government."
1.1.1.2. Major activities of commercial bank
Activity of commercial banks is a special type of activity, such as currency trading
with two main functions of making money and currencies trading aiming at
bringing profit to banks and contributing to the overall development of society. The
principal activities of commercial banks include:
1.1.1.2.1. Mobilization of capital
Business activities of commercial banks are operating in the monetary field. With
the purpose to meet the capital needs of customers, apart from the owner’s equity of
banks, commercial banks conducting mobilization of temporarily idle funds in the
economy under different forms to supplement the business capital of the bank. The
mobilization can be done mostly in forms such as:
- Contributed capital: When commercial bank was established, it usually has a
certain level of capital; this capital is called charter capital. However, during the
operation, it needs to expand business operations; commercial banks can raise
additional funds added to the charter capital to strengthen the bank's business
capital.
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- Source of deposit: This is the main source of money to supplement the business
capital of the bank because the bank's operation is the intermediate between the
people who has the excess of money and people who lack of money for
production, doing business and consumption, and it is the basis of loans to be
profitable and the development of the bank. Customers deposit to banks with a
lot of different purposes or to save or to make payment, depending on the
purpose of customers, banks have the forms of mobilization, such as transaction
deposits, non- transaction deposit.
• Transaction deposit: this is one of the most volatile funds, term of transaction
deposits is very short and because it can be withdrawn at any time without
prior notice. Transaction deposits include deposits for issuing checks,
collection, payment...
• Non- transactions deposits: This is the nature of deposits of depositors'
savings, this kind of deposit usually has longer term and more stable nature,
this is an important source of cash for commercial banks to implement its
business. However, the interest rate of this type of deposits is higher than
transaction deposit.
- Loans from central banks and other credit institutions:
The central bank is a bank of all banks, as the last lender of all credit institutions
in case they do not have enough liquidity. In this case, the commercial banks
borrow money to fill the gap, to ensure liquidity in case of necessity. The
mobilization of capital with a reasonable cost and structure will contribute to the
business performance of a bank. Also when necessary for immediate liquidity,
commercial banks can borrow from other commercial banks to meet their
immediate liquidity.
In addition, commercial banks can also raise capital through the issuance of
debentures, savings bonds, certificates of deposit ... this is also an important
source of money to supplement business capital of the bank.
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1.1.1.2.2. Capital Use
After the establishment of a bank, with its own funds and through capital raising
activities, the bank will have certain capital to do its business. Then banks will plan
to use that capital to be rational and most effective, the major capital use activities
of commercial banks are lending activities, investment activities, guarantee
activities ... then commercial banks will gain a certain amount of interest to offset
the expenses of bank such as deposits, reserve costs, business expenses,
management costs ... and the excess called the profits from business activities of
banks. When economy develops, the demand for capital use increases, businesses
and individuals will come to the bank to find a financial prop so they can
supplement capital to their business to improve profitability and vice versa.
1.1.1.2.3. Other activities
In addition to the above lending and investment activities, the banking business also
include other activities such as local and international payment activities, money
transfer, collection, guarantee and provide information about business, investment
and corporate governance, financial management, financial consultancy, project,
asset management, foreign currency business ... the business was conducted under
the authorization of the customer based on customer payment accounts at the bank.
In countries where financial market develops, these business activities are the array
of services to bring greater revenues for commercial banks. On the other hand,
when these services develop, it will meet the growing needs of customers and fulfill
the needs of the economy development.
1.1.2. Credit activities of commercial bank
1.1.2.1. Definition of credit activities
Credit activity is a basic activity and brings major source of income for commercial
banks in developing countries and less developed countries. The term “Lending” is
understood as: "Lending is a form of credit, which credit institutions offer to
customers to use a sum of money for certain purpose and time period as agreed with
Page 7
the principle of repayment of principal and interest." Therefore, the nature of the
credit relationship is the lending- borrowing relationship with the repayment of the
principal and a surplus called interest after a certain time, or it is also a relationship
of right transfer of capital use to bring profit to all parties.
Under Cambodian Credit Law, the bank credits can be understood as follows:
"Credit by commercial banks is a relationship of cash or asset transaction between
banks and customers, in which banks offer cash or asset to customers to use in a
certain time and customers have the right to use the money, the asset with the
obligation to return the principal and add a surplus called the interest when due."
When banks have strong financial resources, and mobilize more capital, banks are
always looking for investment opportunities, lending to customers to use up the
banks’ capital to obtain the largest profit. Bank credit not only meets short-term
working capital need for the economic organization or individual, but also meets
both long-term capital need of the customer. Thus, bank credit is increasingly
becoming an important activity and is indispensable in the market economy,
especially for poor countries and developing countries including Cambodia.
1.1.2.2. Forms of credit of commercial banks
1.1.2.2.1. Based on purpose
- Real estate loans: Include short-term construction and ground clearance as well
as long-term loan financing for the purchase of farmland, houses, and
commercial centers and buying foreign asset. For these types of loans, the bank
was secured by the real property: land, buildings and other facilities.
- Lending to financial institutions: Including credits for banks, insurance
companies, finance companies and other financial institutions.
- Loans to industrial and commercial businesses: It helps cover costs such as
purchasing, warehousing, pay taxes, pay for officials and employees.
Page 8
- Loans to agriculture: It supports farmers in planting operations, harvesting and
storage products.
- Lending to individuals: to help finance the purchase of automobiles, housing,
household equipment, construction materials to repair and modernize their homes
or grant to cover the individual expenses.
- Other loans: Include loans not included in the above loans and loan for doing
business in securities
1.1.2.2.2. Based on credit term.
- Short-term loans: loans with a term of up to 12 months, as determined in
accordance with the cycle of production, sales and repayment capacity of clients.
- Medium, long-term loans: Loan that is determined mainly for investment
purchases of fixed assets, renovation of equipment, technology, business
expansion, construction of the project with the large scale of capital recovery.
These types of loans are increasingly focused by banks to develop, on the one
hand they meet the needs of business loans, and on the other hand they are also
consistent with the possibility of capital by commercial banks. Medium-term is
considered from 12 months to 60 months, long-term is considered from and
above 60 months but not exceeding the remaining operation period according to
the decision of establishment or establishment license for legal entities and not
more than 15 years for lending to investment projects.
1.1.2.2.3. Based on the mode of lending
- Each-time loan: At each time of borrowing, customer and the bank carry out the
necessary procedures for loans and credit contracts. This method applies to
customers whose borrowing needs are not regular, unstable production, a
seasonal business.
Page 9
- Loans under the credit contract: the bank and the customer identified, agreed
upon a line of credit maintained for a certain period or cycle of production and
business.
- Project loans: Banks lend to borrowers to make investments to develop
production, business, and service and investment projects.
- Syndicated lending: a group of credit institutions lends to a project loan of one
customer, in which a credit institution as a focal point arrangement, and
coordinate with other credit institutions. Otherwise, the syndicated loan must also
comply with the regulation of co-financing of credit institutions issued by the
State Bank. A syndicated loan has the advantage of sharing the risk, but the
disadvantage is loosening the control of customers.
- Installment loans: When lending, banks and customers identify and agree to pay
the loan interest plus principal which is divided into various terms of repayment
of the loan term.
- Business loans through the issuance and use of credit cards: Credit institutions
approved the customer to use the loan within the credit limit to pay for goods and
services and withdraw cash at automated teller machines or cash advance agency
of the credit institutions. When lending through the issuance and use of credit
card, credit institutions and customers must comply with the provisions of the
Government and the State Bank on the issuance and use of credit cards.
- Credit limit: Bank and customer identify and agree on a line of credit maintained
for a certain period of time. The lending and debt collection mix together. This
method applies to customers wishing to pay the regular loan, the business
situation is stable, fast capital turnover and have confidence in the credit
relationship.
- Overdraft limit: The credit institution has a written approval to customers, allow
customers to spend more than the amount of money in the current account of
customers in accordance with the provisions of the Government and State Bank
on payment activities through organizations providing payment services.
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- Provision credit limit: Credit institutions are committed to ensuring available to
borrowers within a certain credit limit. Credit institutions and customers agree on
period of validity of the provision credit limit, the fee payable to the provision
credit limit...
1.1.2.2.4. Based on the level of confidence for customers
- Unsecured loan: Loan with no mortgage/pledge or no guarantee by a third
person. Lending is based solely on their own customers’ credibility. Bank does
not hold a borrower's assets to liquidate to recover the loans when they violate
the contract, but instead are the conditions: the business plan is assessed by the
bank to have feasibility, likely to bring higher profits; business enterprises must
be profitable for two consecutive years at the time of borrowing. Customers are
good customers, honesty in business, a sound financial capability, efficient
management. Then, banks rely on the reputation of customers without additional
sources of debt collection.
- Secured loan: Loan which banks hold the assets owned directly by the borrower
or the property of the guarantor. The common forms of security are: mortgage,
pledge or guarantee. The purpose of this is that when there are any violations of
the loan agreement, the bank has the right to liquidate the property to recover the
loan. This guarantee is the legal basis for banks to have an extra source of second
income supplement for the first debt uncertainty. The secured properties here are
often the real estate property owned by the borrower which the transaction is
allowed, there is no dispute, and the property is insured under the law.
1.1.2.2.5. Based on the origin of credit:
- Direct Lending: Bank finance directly to customers who have needs, and the
borrowers repay the loan directly to bank.
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- Indirect Lending: Loans are made through the acquisition of the debt agreements
or documents and also in the billing period. These forms include: discount, buy
back invoices of sales, business liquidation.
1.1.2.2.6. Based on morphological value of credit
- Loan in form of money: a type of loan supplied by money. This is a form of
bank’s main lending and made by different techniques such as advance lending,
overdrafts, seasonal lending, and installment loan.
- Loan in form of assets: Lending in form of property is very popular and diverse.
The most typical lending is lease-purchase financing. By this method the bank or
leasing company (a subsidiary of the Bank) provides assets directly to customers
and the customers repay principal and interest periodically.
1.2. Credit quality of commercial bank
1.2.1. Definition of credit quality
To understand the credit quality, we start from the quality of goods and services in
general. So, in general, the quality of goods and services is the quality for
customers, it is the one among factors that attract customers. Thus, just as the
quality of goods and services in general, credit quality is vital to the operation of
commercial banks because credit quality reflects the ability of borrowers’ timely
repayment to the banks. So, in different viewpoints, we have different
understandings about the credit quality of commercial banks.
From the viewpoint of the bank: The bank's credit is considered as it has quality
when the bank can recover debts and it brings profit for the bank. Therefore, before
approving loan to customers, the bank must clearly assess the customers in all areas
of loans and, at the same time, calculating lending interest rates reasonably to bring
income to the bank.
Page 12
From the client side: A credit is considered as it has quality when it timely satisfies
the customers’ capital deficiency with reasonable interest rates, fast process and it is
convenient for customers to use the loan and bring higher profits to customers.
Thus, credit quality decides the recoverability of principal and interest, limiting the
possible risks to the banks. Therefore, credit quality has great impact on business
results of the banks. Credit quality not only ensures safety for the operation of each
individual bank, but it also ensures safety for the overall banking system. Thus, in
each of different viewpoints, we have different opinions about credit quality, but for
the author's opinion, the credit quality is defined: "Credit quality is a timely and
reasonably response of customer’s capital demand in accordance with the
provisions of current laws with reasonable cost, ensuring the safe and efficient
development of banks and promote the economy development ".
1.2.2. The important to improve credit efficiency
1.2.2.1. For banks
Currently, in the LDCs and other developing countries in general and in particular
Cambodia, credit operations bring major profit for banks. Thus, in addition to
investment activities and other services, lending activities ensure greater income
(from 70% to 90%) for banks to offset the cost that banks have to spend in
operation. So the bank wants to increase the income they must pay attention to
credit operations. High credit quality will create conditions for banks to increase
revenue, to be safe for credit activity and to be a basis for bank’s credit expansion.
A sustainable expansion will make stable growth for banks. Especially today, when
the economic crisis is going global and increasingly fierce competition in the
financial markets, banks must pay attention to credit quality problems parallel to the
continuous scale of credit growth. Thus, for banks, improving credit quality will
have the effect that: