Appraisal of Project of Loan with Laos Bank for Foreign Trade

Thanks to mentioned-above researches and statements, the thesis finished main task as follows: 1. In this thesis, the author summarized experience lessons from other researchers to gain more detailed knowledge about evaluation of funding investment projects of Banks. This evaluation facilitates investors, sponsors, banks or managers to carry out efficiently socio-economic aspect of projects, as well as gain benefits, create state budget and employment for laborer. 2. In this thesis, the author chose and drew experience lessons in investment project evaluation from countries in the world, Commercial banks of Vietnam and World Bank. These are basic foundations which raises quality of investment project evaluation in Bank for foreign trade of Laos. In particular, evaluation process and content is applied with divers theoretical and mathematical bases and presented under different viewpoints, directions and forms. 3. Analysis situation of investment project evaluation in Bank for foreign trade of Laos in previous years and collected results and limitations: - In terms of result, Bank for foreign trade of Laos is one of the top banks in funding for enterprises, create more job for habitants, develop economy and society, and distribute to state budget - In terms of limitation,Investment project evaluation in Bank for foreign trade of Laos in previous year cannot reach effectiveness as desired. Some projects lost capacity of payment of debts 4. Through a range of research result, in Chapter 3the author also suggested 4 viewpoints, 4 contents for accomplishment, 4 measures and 3 proposals mainly for relevant parties such as: State Bank of Laos, The Government, investors and Commercial Banks in Laos to accomplish investment project evaluation in Bank for foreign trade of Laos in the next future. These areconditions which must be prepared and promoted to use effectively.

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nt loans at Bank. In fact, Investor of project shall partially and wholly inspect, analyze and assess aspects and issues in the pre- feasible research and feasible research 1.1.3. Requirements and tasks set for the appraisal of loans investment projects in commercial banks + Requirements for the appraisal of loans investment project in commercial banks: To master development strategies of bank, sector, localities, regulations and law on economic management, applicable management of investment and construction of the State relating to the project. To understand about the framework, conditions and typical characteristics of project, situation and general economic level of the locality, country and the world. To master business and operations. To master demands and supply of product market of the project. To timely appraise and contribute comments right after receiving the record. To regularly complete processes of appraisal, coordinate and promote the collective intellect. + Tasks set for appraisal of loans investment project at commercial bank: The project is feasible, limiting and reducing the risks, generating basis for use of capital in right purposes and subjects committed in the contract. The project is cable of paying debts of investment project in due. 1.1.4. Essentiality of performing loans investment project appraisal + For investor: Select the feasible project, can make loans, the business operations generate interest. + For bank: (the project has financial feasibility, financial effectiveness, capability of recovering capital in due (principal and interest) and minimize the risks 1.2. PROCEDURES OF APPRAISAL OF LOANS INVESTMENT PROJECT AT COMMERCIAL BANK Depending on characteristics of organization and management, each commercial bank designs and builds for it a procedure of appraisal of investment project consisting many different steps with specific results of each as follows: [18] 5 Table 1.1: Summary of project appraisal procedures Stages of procedure Source and place of information provision Tasks of bank at each stage Result of each stage (1) (2) (3) (4) Establish record for credit issuance - Lending customer provides information - Communicate, propagandize and guide customers to establish the loans record. - Complete record to transfer to the following stage Appraisal of project - Record for loan request from previous stage transferred - Information added from interview and record storing…. - Organize appraisal of financial aspect and non-financial aspect for individuals or department in charge of appraisal - Report result of appraisal to transfer to competent department to decide lending Decision on investment Documents and information from previous stage transferred and report on appraisal result - Supplementary information Decide to lend or refuse to lend based on result of appraisal Deciding to lend or refusing to lend bases on result of appraisal - Legal procedures such as signing the loans contract, notarized contract, and other kinds of contract are made. Here, only basic steps of a procedure of loans investment project of a commercial bank are presented in accordance with the following chart: [32, page. 280] Chart 1.1: General procedures of appraisal of loans investment project 1.3. CONTENTS OF APPRAISAL OF LOANS INVESTMENT PROJECT Appraisal of loans investment project consist of the two main contents as follows: Appraising the project itself and appraising lending customers. 1.3.1. Appraisal of loans project Legally speaking, the following contents should be appraised: Legal status, decision on establishment, investment permit, minute of establishment, certificate of Customer establishing project of request for loans Receiving record of customers Gathering informatioCollecting comments of relevant central ministries, departments, divisions, localities Department of credit organizes appraisal Visiting customer’s place Establishing appraisal report Council Management organize re-appraisal Director of commercial bank Signing the contract Competent person decides investment Establishing appraisal report 6 business registration, charter, decision on appointment of director, decision of appointment of chief accountant…., record of project, finance record, guaranteed assets record and other legal documents. Main contents for appraising the project include: (i) Appraising market aspect of the project; (ii) appraising technique and technology of the project; (iii) appraising organization and management of project performance; (iv) appraising finance of the project; (v) appraising ecological environment and (vi) socio-economic appraisal of the project. 1.3.2. Appraising the lending customers (investor) In this section, main contents include (i) appraising legal status of the lending customer; (ii) appraising financial capability of the customer; (iii) appraising collateral loans. 1.4. METHOD FOR APPRAISAL OF LOANS INVESTMENT PROJECT At commercial banks, appraising staffs must appraise projects on the basis of combining many methods such as: appraisal in orders, comparison, and forecast, analysis of sensitivity and minimization of risks. 1.4.1. Order appraisal method The fact that investment project is performed in procedures from overall appraisal to detailed appraisal, taking the previous conclusion as the premise for the following conclusion. 1.4.2. Comparison method At commercial bank, this method compares contents included in the project in accordance with regulation of law, regulations, appropriate technical norms and standards, international and local practices and practical experiences; analyze and compare to select the optimal method. The project is compared with the projects under establishment or operation. 1.4.3. Forecast method Forecasting projects of appraising staffs at the commercial bank bases on the statistical extrapolation methods and methods of transmission of the norm expert opinions. Use of which forecast methods depends on the contents of appraisal of the project. 1.4.4. Analyzing the sensitivity of the project This method is used to test the viability of the financial performance such as profitability, net income, rate of return etc…of the investment project. It is assumed to pose changes for one or more factors to consider how it affects the project, which factor has much and little influence to manage them in the implementation of project. 1.4.5. Risk minimization method To ensure stability and effectiveness of the project, it is often forecasted that some risks may occur to have appropriate economic or administrative methods to 7 minimize the impacts of risks or distribute risks relating to the project. 1.5. FACTORS IMPACTING QUALITY OF APPRAISAL OF LOANS INVESTMENT PROJECT AT COMMERCIAL BANK 1.5.1. Các nhân tố chủ quan Internal factors actively controlled and adjusted by the Bank include: Leader, appraising staffs, procedures and method of appraisal, information serving appraisal, organizing controlling appraisal and technical facilities to serve appraisal. 1.5.2. Objective factors In terms of macro-environment: Legal environment, state mechanisms, and impacts of inflation, rate exchanges, political environment, natural environment and owner of investment project: Composing information to serve initial establishment of project. 1.6. EXPERIENCES IN APPRAISING INVESTMENT PROJECTS OF VIETNAM BANK FOR FOREIGN TRADE AND INTERNATIONAL CREDIT ORGANIZATION AND LESSONS 1.6.1. Experiences in appraising investment projects of Vietnam Bank for Foreign Trade. Appraisal procedures: At Vietnam Bank for Foreign Trade, the procedure is conducted with steps as follows: receiving records, collecting information, organizing appraisal, appraisal talent (if any), establishment of appraisal report (report on talent of appraisal). Vietnam Bank for Foreign Trade built credit handbook including detailed guidance for profession of appraisal of project; however, the Bank has not built procedures and guidance for appraisal profession of FDI project. Contents of appraisal of project at Vietnam Bank for Foreign Trade: Credit staffs processing record of investment project of customer established and submitted to leader of bank the report with contents as follows: A. Appraisal of legal record. B. Appraisal of finance (project record). C. Loans guarantee. Method of appraisal: The Vietnam Bank for Foreign Trade often applies method of appraisal in order from general appraisal to detailed appraisal and method of comparing criteria under comparison: total investment, structure of capital, investment, technology level, financial effectiveness criteria ((NPV, IRR, T(PP)…) and other method such as: Forecast, risk minimization….use and combination method is still limited 1.6.2. Experiences in appraisal of project of the World Bank Experience of the World Bank in appraising investment project is divided into 5 stages (identification, preparation, negotiation, approval and performance). In terms of content of appraisal, the World Bank divides issues into 6 groups: (Economic, technical and environmental issue, institutional issues, financial issues, and commercial issues, cultural and social issues). In terms of procedures of appraisal: (Pre-appraising, 8 preparing documents for appraisal, appraisal by council). In terms of appraisal time: Each project has 12 to 14 weeks (excluding pre-appraisal with 6-7 week). Each job: (12 days for completing documents of the project; 10 days for drafting legal documents; 6 weeks for appraising the field; 1 week for adjusting minute of appraisal). In terms of appraisal: Group leader plays a very important role. The cost of appraisal is always identified suitably and favorably. 1.6.3. Some experience lessons withdrawn from appraisal at bank and international credit organizations. For new projects, Vietnam Bank for Foreign Trade only considers lending loans when the capital of investor accounts for over 20% total investment. For lending loans to renovate techniques, technology and a part of existing equipment, or expand operations etc…with the capital not more than total existing assets of the investor, the owned capital contributed to the project must not be provide if the project is not effective and incapable of paying debts. The project is effective when the simple profit rate > rate of bank. The time for capital refund is as short as possible. The project is considered to be capable of paying debts when rate of debt payment ≥ 1,5. IRR standard used to select the project will lead mistakes when projects as substitute have different conditions and different scale, different life-expansion and different investment duration. CHAPTER 2 CURRENT SITUATION OF LOAN INVESTMENT PROJECT APPRAISAL AT BANK FOR FOIREIGN TRADE OF LAOS 2000 - 2011 PERIOD 2.1. RESULTS AND FACTORS AFFECTING LOAN INVESTMENT PROJECT APPRAISAL OF AT BANK FOR FOREIGN TRADE OF LAOS 2.1.1. Results in appraisal of loan investment projects at Bank for Foreign Trade of Laos From 2000 until 2011 Bank for Foreign Trade of Laos has appraised 803 projects, lent 735 and refused to lend 68 projects. Detailed data is shown in table 2.1 9 Table 2.1: Quantity of medium-long term investment projects appraised in 2000-2011 period Program Year Loan sales of TD TDH Billion of Lao Kip Debt collection sales of TD DH Billion of Lao Kip Number of disbursed projects Number of projects refused to be lent Number of invested projects 2000 56,46 47,80 55 6 61 2001 48,39 51,69 57 7 64 2002 62,37 11,35 31 3 34 2003 73,19 58,11 41 6 47 2004 75,46 59,84 36 5 41 2005 104,26 90,72 45 4 49 2006 156,66 104,33 58 6 64 2007 186,54 126,07 67 7 74 2008 207,84 146,89 81 8 89 2009 235,16 162,36 85 6 91 2010 294,53 183,72 87 7 94 2011 313,12 235,92 92 3 95 Total 1.813,98 1.278,80 735 68 803 BQ 151,16 106,57 66-67 6-7 73 Source: Annual economic report of Bank for Foreign Trade of Laos [56] 2.1.2 Economic – social factors affecting the appraisal of projects at Bank for Foreign Trade of Laos Subjective factors consist of: a leader, appraiser team, process and appraisal method, information for the work of appraisal, organization and management of appraisal and technical facilities for appraisal. Objective factors: For macro environment: Legal environment, State’s policies and mechanism, impact of inflation, exchange rate, political environment, natural environment and an investment project owner 2.2. CHARACTERISTICS OF BANK FOR FOREIGN TRADE OF LAOS 2.2.1. Introduction about Bank for Foreign Trade of Laos Bank for Foreign Trade of Laos has its Head office which is located at Road No. 1 Pangkham, Xiengnhun mountain village, Chanthabuly district – Vieng Chan Capiral, Laos. Its international transaction name is Banque pour le Commerce Exterieur Lao (abreviatedly BCEL), which is a state-owned commercial bank, established and operated since 1975.In Decree No. 11/ND-CP dated 30/11/1988 by the Laos Government “the subsidy regime in banking system was removed. One-level State bank system was changed into two-level bank system: State banks and commercial banks”. Charter capital of Laos State bank at that time was defined to be 1.93 billion Laos kips with operation duration of more than 20 years since the governor of state-owned bank signed the re-establishment decision according to state-owned branch model. After nearly one pilot year, until November 01st, 1989, Bank for Foreign Trade of Laos has 10 just begun to change from a state bank branch into a state commercial bank under Decree No. 129/NHNN and Decree No. 4284/NHNN dated 11/11/2010 by Laos’s State-owned bank with the charter capital of 610.43 billion laos kips and operate full business model under the management of State-owned bank. Until early 2012, it became a strong system including: 18 branches, 25 transaction offices, 11 foreign exchange offices, 78 automatic teller machines nationwide, international card service (credit card) and other services, which has participated in 2 (securities, credit leasing) companies and in 3 foreign joint-ventures (Vietnam: insurance, bank and France: bank) and has currently agent relationship with over 25 banks on over the globe and more than 100 accounts, ensuring to serve customers’ requirements well. There are employees of up to 997 people including 1 doctor, 61 masters, 514 people at university level, 317 people at college level, 26 people at middle-level school level, 8 people at vocational level, 3 people at high school level and 67 people working under contracts, 124 people of whom are credit staff (11 masters, 79 people at university level, 33 people at college level, 1 person at middle-level school level). 2.2.2. Characteristics of Bank for Foreign Trade of Laos affecting the appraisal of investment projects Bank for Foreign Trade of Laos grants credit to state-owned enterprises, individual business households joint-venture enterprises, cooperation enterprises, cooperatives, individuals, especially import-export enterprises, foreign enterprises and other financial organizations etc. under the forms of loan, discounting commercial papers and value papers, guarantees, financial leasing and forms as stipulated by the state-owned bank and under the forms such as (short-term loan in order to meet capital requirements for production, business, living services (circulating capital), medium and long-term loan for purpose of exercising investment projects into development of production, business, services, life (fixed capital), and loans as decided by Prime Minister if necessary but there must be the government security (Ministry of Finance). * Bank guarantee: - Loan, payment, contract performance, bid, product quality assurance, refund, counter guarantees and other guarantee forms for local and international organizations, individuals as stipulated by the State bank. - Loan, payment guarantees and other bank guarantee forms of which beneficiary is a foreign organization, individual). The branch performs the operation of discounting commercial paper and other short-term valuable papers for organizations, individuals, rediscounting commercial paper and other short-term valuable papers for credit organizations, individuals). * Payment services and funds: (Provide means of payment). Carry out domestic payment services for customers. Perform cash collection services. Exercise services of collecting and delivering cash to customers. Exercise international payment service as 11 stipulated by the law). 2.2.3. Overview on the improvement process of legal documents related to appraisal of loan investment project at Bank for Foreign Trade of Laos - Bank for Foreign Trade of Laos always plays a main role in the lending bank system to bring economy to develop as oriented by national economic-social development, which is the most prestigious bank in the fields of intermediary business, between the people with excessive money and the people lacking money. Until early 2012, Bank for Foreign Trade of Laos has developed and become a non-stop strong system regarding to process of improving its loan investment project management mechanism by issuing documents on credit. The documents helped the bank base, check and control loan use process. 2.3. ANALYSIS OF CURRENT SITUATION OF APPRAISAL OF INVESTMENT PROJECT AT BANK FOR FOREIGN TRADE OF LAOS 2.3.1. Investment project appraisal organization of Bank for Foreign Trade of Laos Project appraisal is made by three departments: Department of borrowing encouragement, Department of credit management, and department of assets management. In addition, there are also internal inspection department, accounting department and other departments etc. Chart 2.1: Entities related to the appraisal of investment projects at the Head Office of Bank for Foreign Trade of Laos and its branches Director Board of Management Credit member (Credit Council) Deputy director directs credit and capital operating industry Chief of Credit Department Deputy Chief of Credit Department Chief of TS Operating Department Expert Deputy Chief of Credit Department Chief of Credit Operating Department Expert Expert Chief of Borrowing Encouragement Department Branch director Expert Chief of Borrowing Department 12 2.3.2. Investment project appraisal process at Bank for Foreign Trade of Laos Project appraisal process at Bank for Foreign Trade of Laos is conducted in accordance with the provided steps: From receiving files, collecting information, organizing preliminary appraisal, detailed appraisal, establishing an appraisal report includings 7 steps: done as procedures such as: [57] Ineligible or not feasible or exceeding deciding level Satisfactory or feasible results Chart 2.2: Detailed process of investment project appraisal organization Chart 2.3: Project appraisal steps A client submits a file Borrowing encouragement department prepares a file applying for loan to appraise premilinarily Chief of Credit Department Department of operating credit collects information, appraises in details Refuse Prepare an appraisal report Credit Council/Board of Management organizes reappraisal Decide to lend Issue a letter to the client Sign a contract General Director A customer makes a requesting project Officer/Chief of Borrowing encouragement department organizes preliminary appraisal Chief of Credit Department Board of Directors Responsible person of credit department Department of operating credit organizes detailed appraisal Borrowing officer of branch organizes preliminary appraisal Branch’s credit operating officer organizes detailed appraisal Board of branch person in charge of credit Branch’s chief of borrowing department Branch Director Credit Council Reappraisal organization General Director Prepare a report to submit competent person Board of Management Reappraisal organization Sign a contract Branch’s credit council organizes reappraisal Competent person decides to lend Board of Directors Person in charge of credit department Sign a contract 13 2.3.3. Content of investment project appraisal at Bank for Foreign Trade of Laos The bank appraises projects for some contents such as appraisal on legal aspect, aprpaisal on market aspect (formal), appraisal on organization, project performance management (xem qua) and appraisal in terms of project finance. Some remaining contents are rarely appraised [47] 2.3.4. Investment project appraisal method at Bank for Foreign Trade of Laos On basis of interview with Chief of Credit Department as well as on-site survey, it is shown that Bank for Foreign Trade of Laos has applied two methods such as appraisal method according to the order from general appraisal to detailed appraisal and comparison and contrast method. Forecasting, sensitivity analysis and risk reduction methods are seldom used. 2.3.5. Detailed project appraisal at Bank for Foreign Trade of Laos The thesis mentioned appraisal of a particular project (Appraisal of mineral mine exploitation investment project with codonating loan of US $ 20 million acted by Bank for Foreign Trade of Laos as focal point). Appraisal of investment projects in the bank is based on mainly information and files provided by clients, reliable information source inside and outside the bank, CIB to compare and contrast, apply information collection and processing skills. Project technology appraisal is still restricted. Finance appraisal of projects uses targets of NPV, IRR, T(PP) etc. In fact, calculation targets still lack accuracy. Payback duration, project analysis under risk condition remain simple. However, for majority of investment projects, accounting and financial position has not checked and certified by an independent inspection agency yet. For appraisal of secured assets: Some projects don’t have securing assets, but only certificate of other financial institution appraised formally, not strictly. Through analysis, illustrating examples, the thesis has evaluated archived results as well as indicating shortcomings in this appraisal of project. The appraisers are still short of experience, capacity. The officers are weak about professionalization both in depth and width of architectural engineering based on available data and information sent to the bank by clients. (if not appraise strictly, detailedly, carefully, it can result in “Netherlands disease”. (i.e. exploitation of resources does not help Lao People's Democratic Republic develop sustainably) 2.4. EVALUATION OF LOAN PROJECT APPRAISAL AT BANK FOR FOREIGN TRADE OF LAOS 2.4.1. Achievements in loan investment project appraisal at Bank for Foreign Trade of Laos In the past time, appraisal of loan projects at Bank for Foreign Trade of Laos has also achieved positive results. From 2000 until 2011 Bank for Foreign Trade of Laos has appraised 803 projects, lent 735 and refused to lend 68 ones. Detailed data is shown 14 in table 2.1 For appraisal process: On the basis of theoritical and practical research on appraisal, Bank for Foreign Trade of Laos has strict process, many specific steps. The bank’s appraisal process is decentralized synchronously and detailedly by vertical, generally agreed for the entire system from head office to branches with clear division of power and responsibilities of each individual as well as departments participating into this appraisal. However, the duration is rather short if compared to Vietnam commercial banks causing appraisal results not to be high. Table 2.3: Comparison of investment project appraisal duration Define situation appraisal duration for a project Project group Vietnam Laos A Not more than 40 days Not more than 18 days B Not more than 30 days Not more than 13 days C Not more than 20 days Not more than 13 days Vietnam data source [8], Laos credit manual [57] For example, Group A project is a big one. It has 18- day duration for appraisal so that it must be completed all works during appraisal process. Appraisers can do each step without care to be in time with regulated time. If appraise carefully, it can exceed regulated time. Thus, some projects lent by the bank are not effective when executing business operations. It is advisable to shorten some steps in appraisal process and add some days to appraisal duration. For appraisal content: Officers have applied some contents such as appraising regarding to legal aspect, appraising market aspect, project management organization, project finance. Ecological environment and economic-social appraisal is seldom applied. Own project and client (investor) appraisals are not analyzed clearly. In addition, compared to theory, in fact, for market aspect appraisal, an officer appraises the market aspect of project basing only available data and information given by the client. He/she does not appraise market supply and demand in connection to products of ongoing project and define type of market and product of project etc. due to not enough information to compare. In appraising technical design, the appraiser lacks experience in architecture, machine and equipment techniques etc. For project performance organization, manager appraisal, the appraiser only browses structure, organizational form, project performance management. He/she does not consider carefully the issues such as project operational organization level, capacity in finance, production and business management, human resources of project (quantity of laborers, technical level, workmanship, training plans, supply ability). For project finance appraisal, the appraiser applies only some targets to evaluate 15 the project and make a decision to lend, especially basing on securing assets, if compared to theory, it still lacks reliability and efficiency of financial appraisal of Bank for Foreign Trade of Laos is not high. For ecological environment and socio-economic appraisals, the bank’s appraiser only take a glance at data from relevant specialized ministries For appraisal method: Bank for Foreign Trade of Laos is allowed to apply two traditional methods such as by-order appraisal method and comparison and contrast method but some remaining methods are rarely applied. Therefore, effeciency of the bank’s investment project appraisal is not high and some projects are involved in overdue debts and outstanding debts. To prevent risks based on securing assets, ability of project operation is rarely calculted. Forecasting, sensitivity analysis and risk reduction methods are not applied because appraisers still lack experience, are not similar and there is no guidance document for application. For officers: Credit officers are usually trained for the purpose of supplementing, improving operations, level to satisfy increasingly high requirements for the bank’s project appraisal but, compared to work volume in present era, it is not enough, still short of professional experience and quantity. For information, materials for appraisal: Information and materials are available but, in fact, they don’t meet requirements and are not exact because some enterprises have three types of accounting statements such as: accounting statements for banks which have quite high profit to be lent capital, accounting statements for Ministry of Finance (Tax Department) which has quite low profit to pay less tax and the remaining statements for enterprise which are main one. Thus, when the bank receives unexact data and information, it is difficult to appraise and appraisal results are not exact because there isn’t a information system to compare. Technical facilities for appraisal: In general, Bank for Foreign Trade of Laos has positive technical facilities. However, if compared with neighbouring countries, it does not keep up with in present era. The investment project appraisal quality of Bank for Foreign Trade of Laos isn’t generally high if compared with the foresaid achieved results. In 2010, Bank for Foreign Trade of Laos applied ISO 9001-2008 credit quality control to project appraisal, therefore, appraisal process, appraisal content, appraisal method and investment project appraisal are agreed from head office to branches. However, to which extent in quality of investment project appraisal is improved, depending on each branch because appraisers lack experience, their profession is not uniform and quantity is not enough. This is reflected through unstable credit quality of past years and overdue account outstanding continously went up and down. The appraisal of loan project at Bank for Foreign Trade of Laos generally has unhigh results in connection to 16 process, content, and method, which can be seen in charts 2.1 and 2.3 below. Overdue and bad debts formally go down but they go up by value. 0 1.000 2.000 3.000 4.000 5.000 6.000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Chart 2.1: Comparison of bad debts with total account outstanding from 2000 to 2011 0 1000 2000 3000 4000 5000 6000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 total account outstanding short-term debt medium and long-term debt Chart 2.2: Comparison of situation of short-term and medium-long term loans from 2000 to 2011  Total account outstanding  bad debt 17 0 1.000 2.000 3.000 4.000 5.000 6.000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 total account outstanding bad debt Overdue debt Chart 2.3: Comparison of situation of bad debts, overdue debts with total account outstanding from 2000 to 2011 Table 2.7: Credit operation according to economic sectors Unit: Billion of Lao Kips Year Total loan at the end of year Industry- handicraft construc tion equip ment Transp ort post office Agricul ture - forestry Commer ce - service Other 2000 556,49 301,15 88,53 52,28 114,53 - 2001 904,74 414,82 317,33 31,12 141,47 - 2002 321,20 145,56 113,32 10,97 51,35 - 2003 992,56 241,99 380,57 47,83 322,17 - 2004 1.054,38 257,99 405,53 46,38 344,48 - 2005 1.371,64 429,84 409,98 17,96 345,56 168,30 2006 870,86 307,92 63,06 16,86 327,08 155,93 2007 873,17 385,69 125,63 22,74 339,11 - 2008 1.382,43 360,89 206,78 40,03 857,73 - 2009 1.894,30 292,21 408,44 48,82 1.166,78 - 2010 2.705,47 353,44 735,05 79,05 122,59 49,78 1.375,13 25,43 2011 5.141,56 785,02 1.208,37 405,90 503,07 237,13 1.837,40 164,67 Tổng 16.300,68 3.976,52 4,062,59 208,39 284,26 481,78 6,872,81 414,33 Making up weighting % 100 24,39 24,92 1,28 1,74 2,95 41,88 2,54 Source: data from annual economic reports of Bank for Foreign Trade of Laos [56] 2.4.2. Restrictions in loan investment project appraisal at Bank for Foreign Trade of Laos The appraisal of investment project at Bank for Foreign Trade of Laos has been constantly strengthened and improved quality for the past time. However, besides the achievements, the investment project appraisal of Bank for Foreign Trade of Laos also has some restrictions, affecting the quality of investment project appraisal such as decentralizational appraisal process with too many steps, resulting in taking a lot of time and only single process is applied for all projects in different sectors. For appraisal content, there is no clear distinction between project finance appraisal content and 18 investor’s finance appraisal content and many contents are still stopped at quire general, non-full appraisal lacking authenticity. For method, appraisers are familiar with traditional methods such as by-order appraisal method and comparison and contrast method. The remaining methods are rarely used. For equipment, technology for investment project appraisal, which don’t meet requirements and there is still a shortage in expenditure for appraisal. 2.4.3. Causes for the restrictions in appraisal of loan investment projects at Bank for Foreign Trade of Laos Although the quality of project appraisal is improving more and more, there are some shortcomings in causes as follows: For officers, credit officers are not enough strong in quantity and quality for law, technique appraisal etc. For Law, law issuance is not enough especially law on project apprasal, non-synchronous accounting law. For information, information is not collected fully, sometimes, it is formal. For equipment, computers do not have high configuration. Internet network is slow, not satisfying demands. Software mainly used in analysis is Microsoft Corporation (Word and Excel). For expenditure, the bank does not have an individual investment fund to pay expenses for project appraisal activity. There is only general investment funds. CHAPTER 3 POINT OF VIEW AND MEASURES FOR ACCOMPLISHMENT OF FUNDING INVESTMENT PROJECT EVALUATION IN BANK FOR FOREIGN TRADE OF LAOS 3.1. DEVELOPMENT ORIENTATION OF BANK FOR FOREIGN TRADE OF LAOS BY 2020 3.1.1. Chances and challenges of Bank for foreign trade of Laos in the circumstance of shift of economy into market mechanism with State’s socialist – orientated regulation Strong point: Bank for foreign trade of Laos is popular in nationwide, has relationship with international banks in different 25 countries, possesses modern equipments compared with other domestic commercial banks, manages a young and qualified staff, and builds branches in provinces. In conclusion, Bank for foreign trade of Laos is a popular bank Weak point: Some branches in provinces cannot access internet; in others, although the internet is available, however, it cannot satisfy user’s requirement. Besides, there are some existences such as young staff without experience, confidentiality of information among banks Chance: Development of some branches of industry and law system will 19 facilitate extension of Bank for foreign trade of Laos in the future. Economy of Laos is more developed than previous years, demand on investment capital also becomes more urgent Challenge: At present, comprehensive open - door policy for international credit institutions and financial agencies will create strong competition in domestic economy. With experience, capital, modern technology and large network in over the world, competition from international bank, non-bank financial institutions and other commercial banks which Bank for foreign trade of Laos must face will become stronger and more severe 3.1.2. Development orientation of Bank for foreign trade of Laos by 2020 + General orientation: Carry out policies of expansion of development of branches and services in every province nation-wide aiming to facilitate capacity of Bank for foreign trade of Laos in supplying services equally. At the same time this Bank also pays more attention to small, medium and big sized investment projects (annual funding increases 18%, annual interest increases over 40%) + Orientation for investment project evaluation: In the next time, evaluation still continues to focus on further accomplishment of process, content and method and capacity of staff (human resource, equipment and information system). In details: Develop staff in charge of evaluation to ensure increase of quantity, quality as well as their owned capacity. Strengthen evaluation process in order to fit sectors of project and evaluation time. Train further specialized technology for staffs in charge of evaluation. Decrease expenditure through improving quality of equipments used for investment project evaluation. Build modern information technology system 3.2. VIEWPOINTS ON ACCOMPLISHMENT OF FUNDING INVESTMENT PROJECT EVALUATION IN BANK FOR FOREIGN TRADE OF LAOS 3.2.1. Point of view: Combination between funding investment project evaluation and document system and investment management innovation in Bank for foreign trade of Laos It is required to continue to invest, strengthen and foster profession, knowledge in relevant sectors of project for staff, especially evaluators from central to local level. Document system relating to project evaluation must be suitable with relevant others. Besides, this bank also pays more attention to evaluation and supervision of capital use and should be careful in disbursement and project performance. Organization and management system of investment project should be strengthened. 3.2.2. Viewpoint: Use of modern equipment and information system in evaluating investment project Equipment and software which are installed in bank must be modern and suitable with general trend of the world 20 3.2.3. Viewpoint: Combination between funding investment project evaluation and innovation of evaluation process, content and methods in Bank for foreign trade of Laos In terms of process: Continue to accomplish evaluation process in the direction of reasonableness, science and synchrony, avoid redundancy and confusion resulting to difficulties in working process of evaluators. Work must be finish in time as stipulated In terms of content: Firstly, evaluators should care for information supplied by popular sources such as Ministries, Quality registration department or mass media. Secondly, they also pay more attention to technical evaluation of investment projects. Thirdly, it is required to improve quality of financial evaluation for investment projects: method for determining ratio r of projects, analyze sensitivity of project in different directions, evaluate irregular changes relating to demands on product in current and incoming projects... Fourthly, on environmental impacts of project relating to buying machine and equipment, the bank should take more care of calculation of environmental cost for projects. In terms of method: Evaluation method affects largely gained results. Forecast and evaluation in the order must be applied flexibly in accordance with each project and sector 3.2.4. Viewpoint: Funding investment project evaluation in Bank for foreign trade of Laos is required to ensure objective requirements and effectiveness State is required to strengthen documents and law relating to operating activities of Restaurant; when carrying out evaluations, project supervision and enactment of law on investment project evaluation must be implement tightly and seriously. Data and information relating to these projects should be published by investors. It is necessary to have solid co-operation among Ministries in evaluating and approving investment project. 3.3. CONTENT OF ACCOMPLISHMENT OF FUNDING INVESTMENT PROJECT EVALUATION IN BANK FOR FOREIGN TRADE OF LAOS 3.3.1. Orientation for investment project evaluation In the next time, orientation for investment project evaluation continues to focus on further accomplishment about evaluation process, content, method and capacity of staff (evaluator, equipment and information system) 3.3.2. Accomplishment of process for funding investment project in Bank for foreign trade of Laos On evaluation, Bank for foreign trade of Laos establishes tight process including detailed steps. It is required to stipulate detailed period for each task to gain the highest results, as regulations in following table: 21 Table 3.2: Comparison of time for investment project evaluation Determine evaluation time basing on situation of project 1 Project group Vietnam Laos Author A Not exceeded 45 days Not exceeded 18 days Not exceeded 30 days B Not exceeded 30 days Not exceeded 13 days Not exceeded 25 days C Not exceeded 20 days Not exceeded 13 days Not exceeded 20 days Unqualified or infeasible or out of decision capacity Qualified or feasible Scheme 3.1: New process to curtail time of project evaluation Scheme 3.2: Project evaluation 3.3.3. Accomplishment of evaluation contents and norms for funding investment project in Bank for foreign trade of Laos The Bank is required to strengthen their document system to supply clear Credit depart. establish and finish lending document Evaluate document Head of Credit department Refuse Decide to lend Customers submit documents Collect informatio n Credit council/ Board of Director Evaluation with details Sign contract Board of Director/ Head of Credit department Project proposed by customer Officer/ Head of borrowing encouragement department finishes documents for preliminary evaluation Credit management department carries out detailed evaluation Sign contract Head of credit department reviews Board of Director/ Head of Credit department General Director Credit council evaluates Board of Director carries out evaluation Establish evaluation report Credit council in branches evaluates Competent person takes action for loan Borrowing officer finishes documents for preliminary evaluation Head of borrowing department in branches Credit manager Branch director Sign contract 22 guideline, supplement evaluation contents with 2 aspects as follows: project evaluation and borrower evaluation (investor) 3.3.4. Accomplishment of evaluation method for funding investment project in Bank for foreign trade of Laos The Bank should use modern evaluation methods, as well as pay more attention to determination of financial effect, time value of money, and choose combined discount interest rate and amortization determination… 3.4. METHODS FOR ACCOMPLISHMENT OF FUNDING INVESTMENT PROJECT IN BANK FOR FOREIGN TRADE OF LAOS 3.4.1. Improvement of capacity for evaluator The Bank must combine with Universities and relevant agencies to open training courses, held conferences, invite experts to take part in talks and exchange experience… Ministries, ministry – level agencies and local organizations can appoint qualified officers to research in foreign countries. Agencies in charge of evaluation should give reasonable treatments for staff, commend and reward in both material and spirit direction for officers who have been well done their tasks. It is necessary to employ officers who are a harmonious combination between capacity and ethnic behavior. Evaluation agency and Bank must carry out policies aiming to attract talent to become long-term staff or invite consultants to become their collaborators. 3.4.2. Supplementation of technology and equipment, application of information technology in evaluation Supplementation of technology and equipment: Bank for foreign trade of Laos should strengthen their investment activities to improve capacity in using evaluation equipments such as computer (both hardware and software). Enhancement of information technology application: Promote information management relating to establishing, evaluating and implementing project. Improve quality of information collection and processing. It is required to ensure that information source is divers, accurate and timely. The Bank should diversify sources of information as well as settle them effectively. Credit information system must be hold uniformly from central to local level in the form of combination between centralization and decentralization. 3.4.3. Increase of expenditure for evaluation It is required to pay more attention to expenditure and increase of expenditure for project evaluation. Bank for foreign trade of Laos should build private investment fund for this activity. 3.4.4. Enhancement of control of quality of funding investment project It should be strengthen further evaluation of financial effectiveness norm. It is necessary to make sure that mortgaged properties were reserved to ensure current 23 investment projects without use for this purpose before. Internal inspection in bank should be boosted to limit risks in lending activities. 3.5. PROPOSALS FOR ACCOMPLISHMENT OF FUNDING INVESTMENT PROJECT IN BANK FOR FOREIGN TRADE OF LAOS 3.5.1. Proposals for State bank and Government On the one hand, state bank should held conferences to discuss and draw experience relating to evaluation in commercial banks. On the other hand, they must strengthen information system, verify credit information center to gain better results The Government is required to create long-term and stable legal environment, enact Law on investment project evaluation and its guiding documents to consolidate, amend relevant legal documents, as well as law on operating activities, accounting and financing, dispute settlement… The Government (Ministry of Finance) undertakes role of a auditing center who in charge of establish an accounting system for uniform use of enterprise nation-wide. However, this system must be connected with auditing center of Ministry of Finance Ministry of Planning and Investment co-operate with relevant Ministries to research and determine cost level for evaluation and consultancy for investment projects of State budget and ODA distributed by State and other projects. To improve legal environment and documents relating to investment project evaluation, it is required to verify out-of-date regulations, remove overlap and contradiction among laws, decrees, circulars and decisions of levels. Principle of accomplishment of legal system is to ensure equality, indiscrimination among enterprises, and enact law on investment project evaluation in the near future. 3.5.2. Proposals for investors Enterprises will take all responsibilities for improving quality of investment project establishment and evaluation, sufficiency and accuracy of information sent to bank as well as publicity of figures relating to borrowing. This important information shall help them to convince bank to fund to continue producing. All enterprises are required to possess accounting system in accordance with law on accounting and international accounting practices 3.5.3. Proposals for Commercial banks of Laos Bank should give detailed supports and guideline for enterprises in establishing funding investment projects. In addition to collecting and checking information supplied by borrowers, it is required to exploit thoroughly data received from credit information center CIB under management of State bank. Commercial banks in Laos should co-operate with each other in publishing figures to improve quality of project evaluation and choose good customers. It also should avoid separation which leads to backlog of debt. The most optimal measure is to consolidate with each other to develop 24 their owned operating activities in market economy at current time Bank should reinforce MIS – Management information system specializing in collecting and processing information Bank continues to build options aiming to improve quality of evaluators at both head office and branches. At the same time they are also required to arrange, employ evaluators in whole system CONCLUSIONS Thanks to mentioned-above researches and statements, the thesis finished main task as follows: 1. In this thesis, the author summarized experience lessons from other researchers to gain more detailed knowledge about evaluation of funding investment projects of Banks. This evaluation facilitates investors, sponsors, banks or managers to carry out efficiently socio-economic aspect of projects, as well as gain benefits, create state budget and employment for laborer. 2. In this thesis, the author chose and drew experience lessons in investment project evaluation from countries in the world, Commercial banks of Vietnam and World Bank. These are basic foundations which raises quality of investment project evaluation in Bank for foreign trade of Laos. In particular, evaluation process and content is applied with divers theoretical and mathematical bases and presented under different viewpoints, directions and forms. 3. Analysis situation of investment project evaluation in Bank for foreign trade of Laos in previous years and collected results and limitations: - In terms of result, Bank for foreign trade of Laos is one of the top banks in funding for enterprises, create more job for habitants, develop economy and society, and distribute to state budget - In terms of limitation, Investment project evaluation in Bank for foreign trade of Laos in previous year cannot reach effectiveness as desired. Some projects lost capacity of payment of debts 4. Through a range of research result, in Chapter 3 the author also suggested 4 viewpoints, 4 contents for accomplishment, 4 measures and 3 proposals mainly for relevant parties such as: State Bank of Laos, The Government, investors and Commercial Banks in Laos to accomplish investment project evaluation in Bank for foreign trade of Laos in the next future. These are conditions which must be prepared and promoted to use effectively.

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