CMMU BAAC Lending Report Finalized

7/30/2019 CMMU BAAC Lending Report Finalized

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Course: MGMG694 Consulting Practice: Banking ManagementInstructor:Dr.Sarayut Nathaphan

BAACs Lending Product Recommendations

1. Kotchakorn N. ID: 54490642. Phattharachit S. ID: 54490693. Ekachai K. ID: 54490714. Chanidapha A. ID: 54490755. Chaowalit S. ID: 54491236. Ornsiri T. ID: 5449044

Section 1: BAAC SWOT Analysis

Strength

rm 1 Academic Year 2011


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The complete value chain of loan products offered by BAAC reflects that BAAC

has deep understanding of agriculture and agricultural-related business.

Weakness

The interest income has decreased when compared with higher lending amount.

The loan this year 2012 has increased by 34% but the interest income increasedonly 15%. Moreover, when compare the net interest income with other

commercial banks, BAAC NII has increased less than the others.

Opportunity

With the opening of AEC in 2015, it is expected that the whole economy will be

expanded especially the export and import business. This would be a big

opportunity for BAAC to support the agricultural-related business in term of

facilitating their international trade activities.

Threat

BAAC still has to expect the delay of loan payment from customers due to the fact

that the agricultural business has uncertainties by its nature.

Section 2: Objective & Rationale for BAACs Lending Products


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In 2011, the value of SMEs export was more than 2 trillion baht, which

accounted almost 30% of the total export values. This value is continuously

growing after the financial crisis in 2009. Last year in 2011, SMEs Export

growth rate is at 27.68%. This number is expected to increase in the same

fashion for the coming years. Table below shows the total number of SMEs

export values and the growth rate from 2007-1011.

Source: Office of SMEs promotion (www.sme.go.th)

Challenges faces SMEs in Thailand

Currently, SMEs business in Thailand has to face a lot of business obstacles,

which includes both marketing and financial aspects. They are lack of

entrepreneurship, outdated technology, insufficient R&D, low standards of

production, difficult access to funding, as well as high and increasing

competition both in the domestic and global markets.

For the SMEs perspectives, the most important challenge that will be given a

big emphasis is the limited access to credits or funding since most of the

SMEs need funding to start-up the business or supports them as theirworking capitals. The difficult access of credit stems from lacking of

information and advice from financial institution, complexity and

inconvenience of borrowing procedure, inadequacy of loan collateral, not

enough qualification or high expense fee and interest rate.

For financial institution perspectives, the problems with these SMEs are

lacking of business experience or proper business plan, no record of income

statement, and no loan collaterals. This would be the main reason why

commercial banks usually lend out up to the loan collateral values. Basically

speaking, the demand for SMEs financing is obviously more than the supply

from financial institution.

Financing situation of SMEs in Thailand

It is very obvious that the demand for SMEs financing has been increasing

over the past few years. The loan amount is expected to grow much more in

the following years. Table below shows the loan amount given to SMEs in

Thailand in 2010-2011.

Size of business Loan amount (Million) Y-O-Y growth rate

2553 2554

Medium size 784,108 855,985 9.2%

Small size 1,559,823 1,787,440 14.6%

Total 2,343,931 2,643,425 12.8%

Source: Association of development Financing institution in Asia and the Pacific
http://www.sme.go.th/http://www.sme.go.th/


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Government policy for SMEs promotion

As mentioned earlier that most of the commercial banks will lend out to SMEs

up to their loan collateral values, therefore the government has recently

launched the portfolio guarantee scheme to simply back-up the SMEs loans.

This program is under the supervision of Thai Credit Guarantee Corporation

(TCG). Last year, the loan amount under this national policy is approximately

around 36 billion baht. These loans are given out through the Specialized

Financial Institutions. BAAC is also one of the members.

SMEs financing segmentation through SFIs

The diagram below shows the loan segmentation given through SFIs based

on the size of the business.

From the diagram above, it shows that BAAC is now mainly serving the small

and micro agricultural enterprises. Therefore, there is still a room for BAAC to

approach some medium-size agricultural enterprises. The agricultural-relatedindustrial businesses still need to get access to funding to support the growth

of their business. Most of these businesses are also involving in the import

and export activities. In the next part, we then will discuss more why we

choose trade finance products to support those SMEs business.


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Why Trade Finance?

Trade finance products are mostly related to the business of import and

export. During the past 5 years from 2007 to 2011, Thailand export and

import numbers have been increasing almost every year, except for 2009.

There was a mass protest in Bangkok during 2009 which affected Thailand

economy negatively.

Examples of trade finance products include letter of credit (L/C), letter of

guarantee (L/G), trust receipt (T/R), packing credit (P/C), aval, and etc.

In THB million 2007 2008 2009 2010 2011

Export 5,302,119 5,851,371 5,194,597 6,113,336 6,707,988

Export Growth 10.36% -11.22% 17.69% 9.73%

Export - Agro Related 849,832 1,048,000 943,758 1,099,037 1,402,411

Agro Related Growth 23.32% -9.95% 16.45% 27.60%

Import 4,870,186 5,962,482 4,601,982 5,856,591 6,982,719

Import Growth 22.43% -22.82% 27.26% 19.23%

Guarantee 1,995,276 2,148,640 2,117,907 2,352,361 2,769,431

Guarantee Growth 7.69% -1.43% 11.07% 17.73%

Revenue on L/G @1.00% 19,953 21,486 21,179 23,524 27,694

Letter of Credit 737,518 871,382 657,265 732,960 934,449

L/C Growth 18.15% -24.57% 11.52% 27.49%

Revenue on L/C @0.25% 1,844 2,178 1,643 1,832 2,336

Foreign Exchange Derivatives 28,089,611

32,123,10

1

29,335,59

2

36,389,02

8 48,568,030

Interest Rate Derivatives 26,859,763

34,925,93

0

37,940,87

2

45,850,74

1 58,059,701

Sum of Plain Vani lla 54,949,374

67,049,03

1

67,276,46

4

82,239,76

9 106,627,731

Growth on FxDE (Vanilla) 22.02% 0.34% 22.24% 29.65%

Source: http://www2.ops3.moc.go.th/

http://www.bot.or.th

From information above; 2 main observations can be identified.

o Export and import have been growing aggressively for the past 5 years

with over 20% growth each year. More importantly, over 18.32% of export is

agro-related products which are the products of our target segment Agro-

related SMEs.

o Trade finance products like L/C and L/G have potential of creating over

THB 30,000 millions baht of income fee in 2011 THB 27,694 millions

from L/G, and THB 2,336 millions from L/C.

2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

BAAC 1,189.00 1,309.00 1,258.00 1,461.00 1,750.00 4.59 4.59 6.23 4.83 5.44BB L 16,693.00 18,351.00 20,200.00 22,028.00 23,334.00 4,020.00 4,315.00 4,173.00 3,741.00 4,236.0

All Banks 72,893.00 82,346.00 90,190.00103,819.00115,878 .0020,441.00 35,131.00 21,540.0026 ,252.00 34,907.0

Fee Income to Int. Inc

BAAC 2.83% 3.01% 3.00% 3.17% 3.31% 0.01% 0.01% 0.01% 0.01% 0.01%BB L 24.83% 26.45% 35.80% 34.60% 28.52% 5.98% 6.22% 7.40% 5.88% 5.18%

All Banks 15.00% 17.20% 22.31% 25.01% 21.68% 4.21% 7.34% 5.33% 6.32% 6.53%

Fee Income Gain on Exchanges

Gain on E xchanges to Int. Inc

Export

Composition 5-Yr Avg %

Agro-Related 1,068,607.64 18.32%

Industrial 4,426,412.44 75.87%

Mineral & Fuel 324,583.84 5.56%

Other 14,278.46 0.24%

Total 5,833,882.40 100.00%

Source: http://www2.ops3.moc.go.th
http://www2.ops3.moc.go.th/http://www.bot.or.th/http://www2.ops3.moc.go.th/http://www.bot.or.th/


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The fee income to interest income of BAAC is significantly lower than BBL

and the average of all banks. In 2011, BAAC has fee-to-interest income of

3.31% in 2011, while BBL has 21.68% and the average of all banks have 21.68%.

So by offering trade finance products to agro-related SMEs, BAAC can

increase its non-interest income portion and ultimately boost the net profit

of BAAC.

In addition to the trade finance products, BAAC should also offer foreign

exchange products to provide one-stop service for its SMEs clients since the

business of export and import will also have foreign exchange currency

transactions. The foreign exchange product can improve the gain on exchange

income of BAAC further consequently lead to higher net profit for the bank.

Conclusively, BAAC should focus on trade finance because export and

import have been growing aggressively for the past 5 years. And the fee

income from trade finance products can improve BAAC performance

significantly since the bank is not performing as well in terms of non-

interest income.

Section 3: Recommended Products for the Objective

Overdraft (O/D)

Nature of Transaction:

O/D is a short-term loan where a bank gives permission to a borrower to have a

negative bank balance up to a pre-arranged limit. The borrowers are charged interest

based on the amount overdrawn and the length of time overdrawn, and are usuallycharged a regular fee for the use of the facility. They have to repay the principal plus

a market rate of interest on any balance.

Benefit of O/D:

Short-term financing to support working capital requirements, which suitable for

customer who only need to borrow at the time.

Overdrafts are easy and quick to arrange, providing a good cash flow backup with the

minimum of fuss.

O/D Transaction Flow:


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Promissory Note (P/N)


Quite simply, a promissory note is a promise to pay. It is a formal commitment (also

known as a loan agreement or contract) between two parties that is usually

necessary when money is borrowed and lent between them.

A promissory note should have several essential elements, including the amount of

the loan, the date by which it is to be paid back, the interest rate, and a record of any

collateral that is being used to secure the loan.

Benefit of P/N:

Short-term financing used to boost up business liquidity

As borrowers, a promissory note gives them a specified date to repay. This will give

you time to earn and save enough money to repay the sum owed plus interest.
http://www.answers.com/topic/promissoryhttp://www.answers.com/topic/collateralhttp://www.answers.com/topic/promissoryhttp://www.answers.com/topic/collateral


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As the lender, promissory notes ensure you will be repaid by a specific date unless

the borrower defaults.

P/N Transaction Flow:

Letter of Guarantee (L/G)



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LG is a type of contract issued by a bank on behalf of a customer who has entered a

contract and promises to meet any financial obligations to the supplier in the event of

default.

A Payment Guarantee for example, serves as a security for the supplier should the

purchaser not meet his payment obligation on a timely basis.

Benefits of L/G

A letter of guarantee often helps firms conduct business with parties they would never

normally get the chance to deal with.

Bank also gets the fee from issuing LG to the customer.

L/G Transaction Flow:


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Aval


Aval is a guarantee added to a debt obligation by a third party who is not the payee orthe holder. The debt obligation could be a note, bond, promissory note, bill of

exchange or draft. The third party providing the aval is usually a bank or other lending

institution.

Benefits of Aval:

Increase contract party confidence for receiving money by specific date as in P/N or

B/E

Help firms to get financial reliable and more chance for doing business.

Bank also gets the fee from providing Aval to the customer.

Aval Transaction Flow:


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In order to increase liquidity of import business, trade finance service in term of

Letter of credit (L/C) and Trust receipt are recommended to importer for

guarantee receiving quality goods on time and ensuring exporter in collecting

payment under L/C terms and conditions. It makes exporters confident of goodsshipment and leads to your import business simply. Furthermore, Trust Receipt

under Letter of Credit will increase trade opportunities by selling your goods first

and paying later .Then, importers can benefit as they can have the funds from the

pending payment to use as working capital in their business.


Letter of credit is a service for importer requiring receiving quality goods on time

and ensuring exporter in collecting payment under L/C terms and conditions.

The service, the Bank undertakes to pay for goods or services per the request of

applicant or importer by opening L/C to the exporter via the exporters advising

bank overseas. The Bank will pay the exporter if all terms and conditions

specified in the L/C are in compliance with the rules and regulations of the

International Chamber of Commerce (ICC) such as complete shipping qualified

goods and correct present document comply with L/C.

Normally, the fee for L/C issuance is 0.25% of the opened amount per 90-day

period. The minimum fee is THB 1,000.

Benefits of L/C:

For exporters: The exporter gets a guarantee of amount and period of payment

which is specified in the L/C. Moreover, you may be use the L/C as collateral for

loans.

For importers: The importers will pay invoice when all the specified conditions inthe L / C is comply completely. Furthermore, importer can schedule delivery aswell.

L/C Transaction Flow:


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The process starts from importer contacts the bank to request credit line, i.e., L/C

or L/C-T/R. After the Bank checks importers credit limit for approval, the Bank willopen L/C to advising bank of exporter in a foreign country. Next, a foreign

(nominated) bank will pass L/C to exporter to confirm before shipping goods and

send export document such as packing credit to their foreign (nominated) bank.

Then, when the Bank receives import documents from a foreign (nominated)

bank, the Bank will verify import documents with L/C and transfer document of

ownership of goods to importer. Finally, the Bank advises exporters nominated

bank of the payment due date, then, bank will pay the nominated bank and collect

payment from importer on the due date.

Trust Receipt under Letter of Credit (T/R under L/C)


Trust Receipt under Letter of Credit is provided to the importer to receive goods

for production or sale and later pay back to the Bank upon the due date.

Short-term credit of not more than 180 days in Baht or foreign currencies for

importers to finance raw material and goods imports for production and sale.

Customers settle credit on the agreed due date. The ownership rights on the

goods produced shall belong to bank until the credit has been fully repaid.

Benefits of T/R:

Trust Receipt under L/C helps enhance a liquidity and working capital so the

importer can ensure that buying raw materials for production or other importproblems will go smoothly.

The loan can be granted both in Baht and foreign currencies.

T/R Transaction Flow:


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The process start from the customer must receive L/C T/R approvals from Bank. Then,

the customer must open L/C with Bank. Lastly, the customer can receive goods for

production or sale and later pay back to the Bank upon the due date.

Export Loans is a loan or loan guarantee designed to stimulate a country's

exports. Typically this involves a direct loan to a foreign buyer of

domestic goods and services, or a guarantee for a private loan to a domesticexporter. The loan essentially guarantees that the domestic exporter will be paid.

For SMEs group and the customers who are related to agriculture business can

be approached by three categories of the export loans which will be stated in the

following pages.


Packing Credit (P/C) is a short term loan which is the maximum period for which

the credit can be granted is not more than 180 days. The loans made available to

exporters in order to finance the procuring of goods, purchase, processing,

manufacturing or packing of goods prior shipment. For those who deal in shippinggoods or machinery overseas, packing credit is a viable loan opportunity since it

offers the exporter a more flexible payment plan than typical bank loans.

The Packing Credit could be offered the financing to the customer in the form of:

Issuing bank


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o Pre-shipment Credit: is provided as a loan or advance by a bank to an

exporter for financing the purchase, processing, manufacturing or

packing of goods to help an exporter fulfill an export order prior to

shipment to the buyer.o Post-shipment Credit: is the credit offered to an exporter to finance export

sales receivables after the date of shipment of goods till the date of

realization of export proceeds. Exporters dont wait for the importer to

deposit the funds.

Packing Credit is subject to the bank policy and the nature of the business. Theloan also required assets as collateral. Basically, the credit line is depending onthe collateral but not exceed 80% of the assets.

Benefits of P/C:

To support the financial term to the exporters in the operating process.

To increases the business liquidity to the exporters and eliminate insufficient of

the working capital.

To facilitate the payment for raw materials and manufactured goods for exporters.

P/C Transaction Flow:

The process of packing credit is started from the exporters who need to expose

the business by using packing credit to support the operation process of

shipment. They will require seeking for the bank representative in order to sign

the L/C agreement regarding packing credit service term. The exporters need to

submit all required documents to the bank. After credit approval exporters will

shift all products to importers together with the importers bank will ask to collect

the bill.

Documents against Payment (D/P)


D/P is a terms of payment arrangement in which an exporter hand over the

ownership documents of products or assets to the bank representative, which

then presents them to an importer only after the bank has received payment for

the asset. Essentially, the bank holds hostage the ownership documents, which

the importer needs to take possession of the merchandise are paid by the

importers. The terms of this agreement are set between the importer and exporter

at the time of the sale.

D/P Sign: terms of payment that the importers must make a payment of the draftamount as soon as the buyer is presented the draft. Basically, the importers need

to pay the draft the amount prior the shipment.

D/P Term: terms of payment that the importers will require to make a payment of

the draft amount at the specific period. Usually the payment period is subject to


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the agreement between exporters and importers. The payment periods naturally

are during 30, 60 or 90 days.

Documents against Acceptance(D/A)


D/A is a terms of payment arrangement in which an exporterinstructs a bankto

hand overshipping to animporteronly if the importer accepts the accompanyingbill of goods or singed on the documents required to take an ownership of the

goods of exchange. In essence, this is a deferred payment or credit arrangement.

The buyers assent is referred to as a trade acceptance. D/A terms are usually

after sight for instance at 90 days or after a specific date between the exporters

and importers, such as at 150 days bill of lading date.

D/P and D/A charged by bank is subject to bank policy with a minimum rate at

1,000 THB.

Benefits of D/A & D/P:

Sources of working capital to the exporters.

Facilitates the granting of trade credit to a sellers and buyers.

Lower the risk for the exporters that the importer will refuse to pay. Ensure the seller that the buyer will have to pay the bill approved before the

product is released.

D/A & D/P Transaction Flow:

The exporter ships goods and prepares the export documents.

The exporter completes an exporter collection form and sends the export documents

to the bank together with a bill of exchange demanding payment from the importer.

The exporter's bank sends the export documents together with the bill of exchange to

the importer's bank to be released to the importer against their acceptance or against

their payment.

The importers bank approaches the importer to accept the bill of exchange. Followed

by a payment to the exporters bank then right after that transfer to the exporters.


For clients with business of export or import

FxDE contracts are contracts specifying the future date of transactions forexchanging foreign currencies or interest rates between two parties; which

.
http://www.businessdictionary.com/definition/exporter.htmlhttp://www.businessdictionary.com/definition/exporter.htmlhttp://www.businessdictionary.com/definition/instruct.htmlhttp://www.businessdictionary.com/definition/bank.htmlhttp://www.businessdictionary.com/definition/bank.htmlhttp://www.businessdictionary.com/definition/shipper.htmlhttp://www.businessdictionary.com/definition/importer.htmlhttp://www.businessdictionary.com/definition/importer.htmlhttp://www.businessdictionary.com/definition/importer.htmlhttp://www.businessdictionary.com/definition/bill-of-exchange-BOE.htmlhttp://www.businessdictionary.com/definition/bill-of-exchange-BOE.htmlhttp://www.businessdictionary.com/definition/bill-of-exchange-BOE.htmlhttp://www.businessdictionary.com/definition/exporter.htmlhttp://www.businessdictionary.com/definition/instruct.htmlhttp://www.businessdictionary.com/definition/bank.htmlhttp://www.businessdictionary.com/definition/shipper.htmlhttp://www.businessdictionary.com/definition/importer.htmlhttp://www.businessdictionary.com/definition/bill-of-exchange-BOE.htmlhttp://www.businessdictionary.com/definition/bill-of-exchange-BOE.html


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the exchanging rates are agreed on the agreement date (Trade date) ortoday.

Benefits of FxDE:

FxDE contracts can help clients managing their foreign exchange risks. WithFxDE contracts, exporters or importers will not be affected by the swing ofthe foreign currencies as the rates have already been locked in since theTrade date.

By offering FxDE contracts, BAAC can generate profit in terms of gain onexchanges by sending FxDE orders from clients to commercial banks atprofitable rates without creating any directional or foreign exchange rate risk.

FxDE Transaction Flow:

In this case, Company A is an exporter who has future income in USD

currency on 31 August 2012. To prevent the risk from the movement ofUSD/THB exchange rate; Company A requests for a foreign exchangecontract with BAAC for USD 10,000 against THB on 18 July 2012 the tradedate.

BAAC then contacts Bank B who is a swap dealer in the financial market torequest for the same transaction that Company A contacted BAAC for.

o Bank B quotes the rate to BAAC at USD/THB 34 Baht.

BAAC informs Company A that for USD 10,000 on 31 August 2012, CompanyA will get USD/THB 33 Baht from BAAC.

By doing this kind of transaction, BAAC can generate gain on exchange frommatching clients FxDE contracts against other banks contracts withouthaving to carry any exchange rate risk.

Section 4: Recommended Strategies for the Objective


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Strategy 1: Established Brand Awareness of banking products to the SMEs customers

in related to agriculture; and create customer loyalty and develop banking product and

service by using customer relationship management (CRM)

Rationale for the strategy:

1. Brand Awareness is the primary step to illustrate the features of banking products to

the potential customers and how to create the products recognized by the market

target. It is the brand recall and the brand recognition of the company or products tothe consumers then the customers become the brand royalty.

The strategy one is supported by the Market Funnel Concept. Established the

brand awareness is an important way of promoting banking products. Market Funnel

is the marketing models that how we created the potential customers and how to

preserve them to be a brand royalty. The model started by Brand Awareness which is

the strategy to make those consumers to familiar with the product. It is the degree to

which consumers precisely associate the brand with the specific product. Then move

up to Consideration phase which is the beginning step of deciding between the most

likely purchases, taking test-drives, going to a product demonstrations and running to

the Conversion phase to make the purchase. Regarding the marketing Funnel to

establish brand awareness is a crucial part to sustain the potential customers to

become a Brand Royalty.

This is because banking products; there are very few factors that

differentiate from its competitors. Therefore, the products that

maintain the highest brand awareness compared to its competitors

will usually get the most sales. Brand Awareness is the first step drive

up the buying decision and sustains the customers. It is an essential

part of brand development which helps the brand to stand out from

the others in the competitive market.

2. Customer relationship management (CRM) is a widely implemented model

for managing a banks interactions with customers, clients, and sales

prospects. Moreover, it also has a significant impact to the bank to increase

their customer loyalty in the banks product.

Providing financial products to meet customer needs in order to

expand market share.

Developing new products and Create a campaign in order to offer the

benefits of product to new customers.

Due to the fact that BAAC already has implied Customer

relationship management (CRM), our strategys method recommends developing CRM to

provide products to customer base on individual needs as follows.


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1. Improving RM (Relationship Management)

Normally, RM is an introduction to contribute relationship between

bank customers and products. However, RM should improve the

responsibility by increasing understand in both financing and

personal of customer behavior. It will help the bank can offer the

products that support and satisfy customers need and lead to be a

customer loyalty in future.

2. Developing the Sufficiency Economy Learning Center of BAAC Now a day, BAAC has over 84 centers all over the country but there

are a few effective centers which can take care of themselves. Then,

BAAC should to develop the Learning Center by focusing on these 3

principal as follows.

Knowledge Benefit: The Bank should to contribute knowledge to support

customers growth such as advising customer to create value of

customers products in order to expand their business as global basis.

Value Benefit: The Bank should to make customers feel that they get

benefit and opportunity from the bank. For example, bank provides Trust

Receipt under Letter of Credit, a short-term credit, to the customer who is

an importer to receive goods for production or sale and later pay back to

the Bank upon the due date. The trade finance product will help enhance

a liquidity and working capital of clients business.

Relationship Benefit: The Bank should to form business networking

between customers and their businesses relevant because it is not only

help the bank built a long term relationships with customers, but also lead

the bank gain more new customer from their trading.

3. Increasing the efficiency and effectiveness of lone process in order to

respond the needs of the customer precisely such as:

Setting in the duration of the loan approval process

Increasing decentralizes the authorization of loans approval to the

branch Developing in customer Database

Developing and enhancing the service branches


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Strategy 2: Providing loan products and trading finance with lower interest rate and

fees than other competitors for both retaining old customers and acquiring new

customers

Rationale for the strategy:

1. Lower interest rate means higher competitive strength of banks

Basically the interest rate is one of significant factors of business

owners for loaning decision making. Loan Interest rate is the maincost of business production and expansion. High interest rate of loan

means high cost of business. Therefore, bank can provide loan with

low interest rate can compete with other banks effectively. In other

words, low interest is the competitive strength of banks.

2. BAAC can provide lower interest rate and fees because of lower cost of

funding of the bank

Apart from competitive strength of lower interest rate, BAAC also

have less Interest expense per deposit comparing to other

commercial banks. Notice that Interest expenses of BAAC last year is

less than other top 5 commercial banks about 0.66% which means

that BAAC have less cost of funding than other commercial banks.Thus, because of lower cost of funding, BAAC can provide lower

interest rate for loan and lower fee for trading finance.

Interest expenses/ Deposit in 2007 2011 of BAAC and 5 biggest banks

Interest expenses /

Deposit2007 2008 2009 2010 2011

BAAC 1.93% 1.71% 1.44% 1.41% 1.65%

Growth rate -11.49% -15.84% -1.83% 17.17%

Top 5 commercial

Banks

2.50% 2.05% 1.35% 1.48% 2.31%

Growth rate -17.77% -34.14% 9.66% 55.62%

3. Currently BAAC has already provided lower interest rate

Currently BAAC offers lower interest rates to customers. From the

table above, MLR of BAAC is lower than top 5 commercial banks

around 2% which means that, in situation of 10 million loan, loaning

at BAAC, the company can save the money around 200,000 baht per

years comparing to other banks. This indicates high amount of

money saved with lower interest rate of only 2% which is

extraordinarily attractive to customers.

Interest rate of BAAC and Top 5 commercial banks


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1. BAAC can identify target customers of trading finance by collecting information of oldagricultural related SME customers that have potential to import and export.

2. BAAC can identify target customers of working capital loan by collecting informationof agricultural related SME customers that used to be old customers of commercialloan

3. After identify target customers, BAAC should send RM to the target customersoffering new product by emphasizes on the lower interest rate and fees than otherbanks.

4. After sending RM to target customers, BAAC must follow the feed back via producttrial and questions from customers to improve the communication to customers in thefuture.


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1. By providing risk-adjusted lending & service rates; BAAC can offer its

products and services to agro-related SMEs customer group which normallyget denied for loan request from commercial banks due to their high risks.

Example 1 Company A Company C

Business Corn Grower Corn Grower

Risk Management Locked in future selling price of corn No agreement on future selling price

Situation Fluctuation in corn prices Fluctuation in corn prices

Impact to company No impact to revenue Impact revenue

Implication of risk Less risky to bank More risky to bank

Risk-adjusted lending rate

by BAAC 10% 14%Lending rate without risk adjustment

By Bank XXX Rejected Rejected

Lending rate without risk adjustment

by Bank YYY 12% 12%

Example 1 shows the situation where risk-adjusted lending rate can

help BAAC win customers over Bank XXX and Bank YYY whom do nothave risk-adjusted lending system.

Both Company A and Company C are corn growers. The onlydifference between the 2 companies is Company A locked in thefuture selling price of its corn production through forward

agreement; while Company C did not lock in its future selling price. The fact that Company A has locked in the future selling price of its

product means Company A will not be affected by the fluctuation incorn selling price in the future. This would allow the company tohave stable string of revenue in the future; which translates to lessriskiness in terms of potential borrower of the bank.

Since Company C did not have any forward agreement on the futureselling corn price; Company Cs revenue will fluctuate depending onthe corn price in the market. Fluctuation of future revenue representshigher risk for the lenders.

With the adoption of risk-adjusted lending rate, BAAC can offerCompany A with cheaper lending rate than Company C. In this case,

BAAC can offer Company A at the risk-adjusted lending rate of 10%.BAAC can offer Company C at the risk-adjusted lending rate of 14%.The 4% different is justifiable by the different level of riskinessCompany A and Company C have.


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Operating as a normal commercial bank, Bank XXX might choose toreject both Company A and Company C since both companiesoperate in the SME agricultural sector Bank XXX deemed the wholesector to be too risky for its business.

In the case of Bank YYY, however, without the risk-adjusted lendingsystem; Bank YYY might offer both Company A and Company C atthe flat rate of 12%. Without the risk-adjusted system, Bank YYY willnot be able to differentiate the appropriate lending rate between

Company A and Company C.i. By offering 12% flat rate, Bank YYY will face the problem of

adverse selection offering too high of interest rate to lessrisky company (Co. A), and too low of interest rate to morerisky company (Co. C).

ii. Consequently both companies will choose to borrow from thecheapest funding cost Company A choosing BAAC, andCompany C choosing Bank YYY. However, as Company C hashigher risk, the rate of 12% might not represent true lendingcost for Bank YYY. This could lead to less Net Interest Marginor higher NPL.

From the 3 cases of BAAC, Bank XXX, and Bank YYY; benefits fromrisk-adjusted can be identified. First, BAAC can offer lending ratesthat will not create adverse selection like the case of Bank YYY.Second, BAAC can enjoy the benefit of winning customers (bothCompany A and Company C) from Bank XXX.

2. The adoption of risk-adjusted lending rates can reduce the asymmetric

information problem of adverse selection that is caused by providing samelending rates to all customer groups.

As the Example 1 in the case of Bank YYY has illustrated, withoutrisk-adjusted lending rate; Bank YYY will face the problem of adverseselection providing too low of lending rate to more risky customer.

Aside from the Example 1; many publications have addressed theissue of adverse selection born from the lack of risk-adjusted lendingrates. One of many publications includes Risk Based Pricing by IforiLayegue of KPMG Nigeria whom has made the following statement inKPMG Nigeria website --http://www.kpmg.com/NG/en/IssuesAndInsights/Documents/Risk%20based%20pricing.pdf.

Without understanding the risks of customers, banks often offerunder-priced lending rates to their customers. This offering of under-

priced lending rate can lead to lower quality of lending and ultimatelylead to higher amount of NPL.


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3. BAAC can generate higher net profit by charging risk-adjusted rates to

customers -- higher rates to more risky customer groups, and lower rates toless risky customer groups.

As Example 1 has shown earlier, with risk-adjusted lending system,BAAC can charge higher interest rate to Company C. The higherinterest rate charged is calculated based on the higher level of riskCompany C has. With higher interest rate, BAAC can enjoy higherinterest income and can therefore improve the Net Interest Income

(NII) of the bank.

Year 2007 2008 2009 2010 2011

BAAC NII 28,134 32,096 33,441 32,686 35,790

BAAC NII Growth 14.08% 4.19% -2.26% 9.50%

KBANK NII 37,431 42,436 43,374 46,744 56,491

KBANK NII Growth 13.37% 2.21% 7.77% 20.85%

SCB NII 39,177 44,330 42,005 39,754 50,526

SCB NII Growth 13.15% -5.24% -5.36% 27.10%

BBL NII 47,013 52,927 49,390 45,618 52,696

BBL NII Growth 12.58% -6.68% -7.64% 15.52%

By collecting the financial statements of BAAC, KBANK, SCB, and BBLfor 5 years from 2007 to 2011; one observation can be identifiedfrom analyzing banks NIIs. For the year 2010 and 2011; BAAC fellbehind other banks in terms of NII growth. Especially in the year of2011 where BAAC only managed to generate 9.5% of NII growthwhile the other 3 commercial banks can generate over 20% of NIIgrowth.

If BAAC adopts risk-adjusted lending system; BAACs bottom linewould improve from less amount of NPL, higher interest income forriskier customers, and more lending amount from being able to offerloan facilities to SME businesses that commercial banks denied theirloan requests.

1. Adopt Risk-based pricing in determining lending rates for customers.

Customers with higher risks must be charged with higher interestrates than customers with lower risks.

The risk-based pricing can be adopted by applying the customersriskiness into the credit analysis process. More importantly, the riskfactor should be considered and included when forming the interestrate pricing model. Ultimately each financial institution has differentmethod and approach to determining the lending interest rate; butfor risk-based pricing to take place, the risk element must be

included in the pricing model. Below is the risk based pricing methodology proposed by Ifori

Layegue of KPMG Nigeria in a publication of Risk Based Pricing underKPMG Nigeria website.(http://www.kpmg.com/NG/en/IssuesAndInsights/Documents/Risk%20based%20pricing.pdf)
http://www.kpmg.com/NG/en/IssuesAndInsights/Documents/Risk%20based%20pricing.pdfhttp://www.kpmg.com/NG/en/IssuesAndInsights/Documents/Risk%20based%20pricing.pdfhttp://www.kpmg.com/NG/en/IssuesAndInsights/Documents/Risk%20based%20pricing.pdfhttp://www.kpmg.com/NG/en/IssuesAndInsights/Documents/Risk%20based%20pricing.pdf


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In this pricing methodology, there are many elements in the method;

but the one that is most critical is the Risk Costs. If BAAC can designa database that collects risk-related data like Probability of Default(PD), Loss Given Default (LGD), and Exposure at Default (EaD),then BAAC can incorporate the risk element in its lending ratemodels. This would lead to a risk-based pricing or risk-adjustedlending rates.

2. Classify each customer group based on their risk-driven characteristics

Each stage of SME life cycle has different level of risks. Starting-up

SME business will have low unstable income, and the business willhave hard times identifying lending sources. A medium size SMEbusiness will have more stable revenue and have more access to

lending facilities. Below is the diagram showing different growthstages of SME business. Each growth stage has different income anddifficulty to lending facilities. Source from DG Enterprise published bythe European Commission.(http://ec.europa.eu/enterprise/index_en.htm)

i. To appropriately set up lending rate, BAAC must be able toidentify which growth stage the SME business is in as level ofrisk for each growth stage differs significantly.

Each of the agro-related business has different risk characteristics orcomponents.


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i. Corn growers will have risks in terms of the corn selling pricedetermined by the market. Frozen food producers will haverisks in terms of raw material buying price which themovement of price will have different effects between corngrowers and frozen food producers.

Being able to classify or identify each customer group based on theirrisk-driven characteristics will form a strong foundation and accuracyfor the risk-adjusted pricing methodology of BAAC.

3. Identify appropriate risk factors within each customer group.

Export and import business will have foreign exchange rate risks thatcould impact business revenue. If BAAC failed to identify this riskfactor in the export-import customer group; BAAC will not be able toprice the lending rate accurately.

Rice growers will have risks in terms of the rice selling price asdetermined by the government. Not being able to identify this factorrelated to politics will cause inaccurate lending pricing.

Being able to identify all relevant risk factors in each customer group

will allow BAAC to accurately price the lending rate for each customergroup.