Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013MASTERs OF FINANCE AND CONTROL
THESIS
Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank
for Industry and Trade - Hanoi branch
Prepare by: NGUYEN Quang Duy
Supervised by: Prof. ABADIE Laurence
1
JEAN MOULIN LYON 3 UNIVERSITY VIETNAM UNIVERSITY OF COMMERCE
Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
Hanoi – August 2013
ACKNOWLEDGEMENT
I would like to express my gratitude to all those who gave me the possibility to complete this
thesis.
Foremost, I would like to give my sincere thanks to my tutor, Prof. ABADIE Laurence for
her patience, motivation and enthusiasm. Her guidance helped me in not only studying well but also
choosing the thesis topic. The comments and remarks she shared with me were tremendously helpful
and valuable for the learning, writing and completion of this master thesis.
Furthermore, my special thanks go to Mr. Vu Manh Chien, who is in charge of the Program
for Vietnamese master students, for his suggestion of ideas and introduction of thesis topics to us. He
has also given to all of us great support throughout the entire course so that we could have best
condition to study.
I would also like to express my sincere gratitude to our International and National Teachers
and Professors who have willingly shared and given us their precious and immense knowledge and
experiences during the course. Thanks to their teaching we became higher developed in personal

PROJECTS IN THE FIELD OF PETROLEUM IN VIETINBANK
AND HANOI BRANCH WITH SPECIFIC EXAMPLE
32
3.1. Project brief 32
3.2 Oil reserves and potentials 34
3.3. Assessment of equity transfer process 34
3.4 Transfer method 35
3.5. Capital transfer methods of PVEP 38
3.6. Project progress 38
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
3.7. Market and the product consumption methods 39
3.8. Total investment and capital investment appraisal of the project 39
3.9. Project’s financial efficiency assessment 41
3.10 Project’s risks assessment and mitigation 42
3.11. Tentative benefits of Vietinbank Hanoi Branch in case the loan is
approved
45
Chapter 4 EVALUATION QUALITY OF CREDIT APPRAISAL FOR
PROJECTS IN THE FIELD OF PETROLEUM AND OFFER
SOLUTION TO IMPROVE THE QUALITY AS WELL AS
LIMITATIONS OF THE EVALUATION OF THE RISKS
46
4.1. Results in credit appraisals in the field of Petroleum 46
4.2. Drawbacks in credit appraisals 46
4.3. Impacting factors 49
4.4. Considering solutions 51
III. CONCLUSION 55

efficiency of both banks and their customers.
Appraising an investment project, under the investor’s provisions, means to assess the
investor’s ability, technology, market and financial status, of which financial assessment is the most
vital factor in lending decisions.
Credit appraisal for projects in Vietnam Joint stock commercial bank for Industry and Trade
(VietinBank), especially Hanoi Branch’s, has always received attention in recent years so as to meet
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
the demand for huge capital of investment projects in various economic sectors, including gas and
petro one.
The above mentioned arguments made the author choose the topic on “Credit appraisal for
projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade -
Hanoi branch” for this thesis.
In the structure of returns of Commercial banks in Vietnam, return from credit plays the most
important role. Thus, commercial banks in Vietnam, Vietinbank included, always put credit
evaluation top so we can be sure that we make the best investments in effective and low-risk
projects.
It is reported that, almost 30% of Vietnam GDP is made by Petroleum. That’s the reason why
Vietinbank has been concentrated on creating credit for this field.
In the credit process, credit analysis is the most important step. It determines the quality of
credit entities. A qualified credit product usually minimizes the default risk and the risk of bad debt
expense. Yet, a highly conservative credit analysis will eventually prevent the flow of lending. Thus,
the balance between quality and flexibility in credit analysis has a great impact on the business.
Big institutions as PVN are always one of the potential clients with the tremendous sponsors
from the government. However, these institutions recently have ineffectively used their capitals
(such as misuse of investment, ineffective capital management). It leads to high records of bad debt
expenses. Some had enormous consequences to the economy as a whole, and particularly the
banking system, such as Vinashin, Vinalines. Thus, credit analysis is becoming more and more

costs in a detailed and systematical way to achieve certain desired results and future goals.
For businesses in general, investment projects combine related activities, which are planned
to achieve defined objectives in a given time-frame using certain resources.
On the management perspective, investment projects are a management tool, monitoring the
use of capital, materials and labor to create the financial as well as economic - social results in a
long-time framework.
On the planning perspective, Investment projects are a useful tool to plan in detailed a
business that can lead to economic-social developments and be the prerequisite for future investment
decisions and funding activities.
For commercial banks, an investment project is a funded project on the basis of credit
appraisal of commercial bank. In other words, it is the amount of money that commercial banks loan
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
to businesses or investors on the agreed terms to implement a particular investment project of the
investor.
b. Investment project requirement
An investment project that is compelling and attractive to participants must ensure the
following basic requirements:
- The project must be scientifically sound. This is the most important element of investment
projects. It ensures the success of the project development and implementation. It is shown on the
following criteria:
o Data and information transparency accuracy of the project must be guaranteed. That
is the data and information must come from originated sources.
o Project elements should not be considered separately but in an interrelationship as a
whole. Therefore, the project planning process must be implemented logically and
coherently.
o Measurements calculation must be simple and accurate.
- Projects must fulfill the due diligence process. It must be licensed by the competent

the customer.
o Medium, long-term projects: projects that have a borrowing period longer than 12
months. These projects use the loan to obtain noncurrent assets such as plant, properties,
equipment replacement, infrastructure, etc.
- Based on the Government decree 112/2006/ND-CP on management of investment
projects on construction, investment projects are classified into 4 sub categories: national-level
projects that are passed by the National Assembly on the policy, and three other A-, B-, C-level
investment projects to effectively governance and actively manage the project implementation
process.
Besides, there are various classification methods depending on the project nature and
importance.
d. Characteristics of commercial bank’s project lending
Project lending satisfies the medium, long term financial need of customers to enhance
productivity through expansion investment, replacement investment, etc. The costs of these kinds of
investment include plans, properties, installment, machines, equipment; or the incremental of current
assets to serve the project.
Project lending satisfies the total financial requirement for a project (current and noncurrent
assets investment for the project), creates a financial leverage, ease the shortage of long-term fund.
Project lending assures the customer ownership over their assets over the lending period
compared to financial lease.
Lending process is based on the financial effectiveness of the project measured by the
project’s net present value (NPV) and the project’s internal rate of return (IRR).
Project lending process is implemented according to the current stage of the project.
Project lending must be considered under the aggregate relation of the project elements to
ensure the total timeline of the project, guarantee the payback period.
Project lending contents include the value of equipment, goods, machines, and other costs for
customers to implement a business project and expanding their projects, taking out the interest cost
of the banking loan in the period when projects are under construction and noncurrent assets are not
ready for the medium-and-long-term noncurrent-asset projects that the interest are based on the
value of that noncurrent asset.

discuss and timely find a solution if there is any difference from the agreed contract.
Among the three stages above, the project appraisal, especially the project financial appraisal is
the most important stage that will be the core of the investment process.
1.1.2. Concepts about credit appraisal
a. Concepts
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
Project appraisal is a process of objectively, scientifically and thoroughly analyzing all
economic and technical contents of the project, in the context of natural, economical, and social
environment that leads to the final lending decision.
The project appraisal satisfies different goals due to the party that consider the project:
For the investor, separately implementing the appraisal project while creating the project
bring a more objective point of view of the project, realize the pros and cons of the project and
resolve them.
For the government authorities in the investment and construction fields, the appraisal goal is
to assess the suitability of the project to the industrial, local and national development in four
aspects: target, scope, plan and effectiveness.
For financial and banking institutions, the purpose of project appraisal is to draw accurate
conclusions about the feasibility, economic efficiency, solvency and potential risks of the project to
make the lending decision. Based on the available information and project appraisal experiences,
financial and banking institutions can actively advice investors to adjust and improve the missing
contents of the project, enhancing the project efficiency. Besides, project appraisal is the basis to
decide the loan amount, the lending period, the appropriate collecting level, ensuring the
effectiveness of the project, as well as the repayment timeline.
However, projects are often viewed from the investor’s perspective regardless of thoroughly
consideration. Thus, the appraisal process must be separately and objectively implemented to ensure
its economic and social benefit. Project appraisal is considered the criticized process of the project
planning process.

relationship seems to be the other way around. Projects that are technically impossible should be
eliminated to reduce potential damages in the future implementation and operation.
The technical appraisal of a project includes:
o Location appraisal: this is one of the important aspects of the appraisal. Factors that should
be considered are: the project location should be closed to input sources or its main market;
convenient transportation, suitable delivery costs; available infrastructure, such as road, port,
electricity, etc. to reduce investment costs. Premises must be suitable with the current capacity
and potential development in the future.
o Scale appraisal: analyzing current and potential demand for the project’s product; capacity of
the product in the comparison with market acceptability, the ability to meet capital demand, the
availability of raw materials, machinery, and equipment, as well as the project management
ability.
o Technology and equipment appraisal: this is the determinant factor to the product quality.
Equipment is the key factor of fixed assets that directly influence the product quality and the
production process. Thus, the project must clearly address the criteria for technology, machinery,
equipment, measurement of technology transfer, etc.
o Input appraisal: This is the determinant factor to the project efficiency. Thus, the aggregate
level for core inputs such as energy, electricity, water, etc. should be carefully estimated in a
competently analysis.
o Scale and Capacity appraisal: the suitable design and arrangement of the property to the
chosen technology should be considered thoroughly to ensure the efficiency of the production
process. On the basis of the technical requirement and capacity level, capital requirement for
each item of the project will be rechecked.
o Design appraisal: the project must meet the technical requirement, sustainability, the
application of construction criteria and standards, etc.
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
- Economic and social impact of the project

project, choosing good projects and simultaneously eliminating high-risk projects that are ineffective
and lack of the ability to repay. In addition, the project financial appraisal also assesses the project’s
level of risk for expertise to advise their client of possible solutions to ensure effective operation of
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
the project and minimize the risk for the loan. On the basis of the evaluation results and the level of
risk, expertise can make decisions on the loan amount, term, interest rate, debt collection plan and
loan security measures.
Financial appraisal includes many interdependent factors. Some of the most important factors
are the following: (research and provide some of the content and method so financial appraisals used
by Vietnamese commercial banks)
o The appraisal of aggregate investment, investment structure and capital schedule:
The aggregate investment contains all the costs (initial production cost included) of the
project and is the highest amount of cost that is agreed in the investment contract. It is the value of
all the necessary assets for the project installment and operation; and is the needed capital for the
project.
The appraisal of aggregate investment is very important. It will reduce the possibility of
capital fluctuation in the project’s implementation process that can leads to capital imbalance, badly
influencing the project’s effectiveness and solvency. The basis to appraisal of aggregate investment
depends on the project scale, modernity of equipment, and the financing form. According to current
regulations, aggregate investment includes fixed capital, current capital, and capital reserve.
The appraisal of aggregate investment is not only simple calculations but also the assessment
of the reliability of provided data to recheck the required capital on the bank’s viewpoint.
After estimating the aggregate investment, equity investment, and other sources of fund, as
well as the financial health of the firm, the bank will address the real capital need for the project:
Loan = Aggregate investment – Equity investment – others
The reappraisal of the bank will ensure the lending process to be exact, suitable, and timely,
reducing the possibility of capital imbalance that can lead to capital shortage, misstating the project’s

Operating cash flow = (After tax net profit) + Depreciation + Interest – Initial cash outlay
Normally, project cash flow is negative in the early years of the project when the cash
outlays are delivered but the profit from product and service revenue is still not enough. After a
period of time, when the product has been popular to customers, cash inflow will exceed cash
outflow and the net cash flow will be positive. Thus, the project cash flow has the tendency to rise in
the following years of the project.
Financial appraisal, theoretically speaking, is easy to conduct; but, as the matter of fact, it is
not simple. The project revenue in the following years depends on many factors such as economic
growth, price level, customers’ taste, rival competition. Estimation errors from actual cash flows will
lead to mistakes in financial analysis, and a wrong investment decision as the result. Therefore, to
enhance the quality of the financial appraisal for investment projects, appraiser should not only
calculate financial measurements but also analyze market, technical factors which influence the
project’s cash flow.
o Discount rate appraisal:
Discount rate is the required rate of return that investors require for the project. It is also used
to discount the project’s cash flows in calculating present value. If the project is funded using
multiple sources of fund, the discount rate is the weighted average cost of capital (WACC):
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
W
rack
=
∑
=
m
t
ft
0

financial attractive the project is.
The project is rejected when the NPV < 0, the total project’s income cannot cover its costs.
In the case of NPV ≥ 0, projects should be independent, which means they serve different
tasks, and the choice of a project does not affect the others; then they should all be accepted. In the
case of mutually exclusive, the project with the highest NPV will be accepted.
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
The net present value shows the increase in value of the investment, regarding the time value
of money. It gives a better look at the investment; make the investment decision align with the profit
maximization goal of the firm. However, the net present value cannot tell the profitability of the
project and the relationship between the project’s profit and costs.
NPV reflects the net profit of the project, which has already been discounted back to present,
during its life. For the bank, the consideration is the ability to timely collect the interest and principal
of the loan, not the gross cash flow during the project’s life. Thus, NPV is only the first step to
analyze the project effectiveness, not a determinant factor to the lending decision. Many small NPV
projects are still accepted because the investor has the ability to repay his loan.

The internal rate of return (IRR):
The internal rate of return is the discount rate that makes the present value of future profit
from the project equal the present value of its costs. Thus, the internal rate of return is also a
discount rate that will make the net present value of the project equals zero.
Normally, the internal rate of return is calculated using the linear interpolation method or
trial and error. These methods currently are unpopular due to their complexity, time consummation,
and lack of accuracy. Calculating the IRR by excel spreadsheet reduce the calculating time and
errors.
This measurement reflects the rate of return that the project can obtain. Thus, it can be used
to analyze the project by comparing with the discount rate or the interest rate of the bank. If the
IRR< the cost of capital, the project is rejected. If the IRR = the cost of capital, the investor can

+
+
−
t
i
t
tt
r
K
r
OCB
1
1
PV
B
: present value of the incomes including yearly income of the project during its life.
PV
OC
: present value of the costs
B
T
: project income in year t
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
Co: operating costs.
( )
t
i

Another thing is that smaller Top will reduce the risk of business failure, especially in the time of
high competition. In fact, banks often set the repayment period equal to the payback period to ensure
customers’ ability to repay the loan, and also reduce the risk that customers use their capital to
reinvest if the repayment period is longer than the payback period.
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
 Return on investment:
Return on investment is the relationship between the yearly average profits of the project
during the life of the project and the initial investment.
The yearly average profit of the project during its life is the arithmetic average of the profits
from the beginning until the end of the project.
Among projects, the project with higher return on investment is the better one. This
measurement is simple but does not take into account the difference in the time to recognize the
future profit of each project.
 Benefit – cost ratio (BCR):
The benefit-cost ratio is the ratio between the benefit and the cost of a project. These data
could be at the present value or future value. Normally, the CBR is calculated as:
BCR =
∑
∑
=
=
+
×
+
×
n
t

The B\C is used as a benchmark to rank independent projects. In the case of mutually
exclusive projects, we cannot use the B\C.
o Risk appraisal:
Risk is uncertainty; it is the difference between the expected value and the actual value. The
project’s risk can be seen as the difference between the actual profit and the expected profit. There
are always potential risks and they can largely affect the project effectiveness.
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
The average life of a project is from 10 to 50 years. Projects are created and analyzed based
on their operations and future profits. In the market economy, data are always changing, especially
future data. Thus, risk cannot be eliminated. In the above analysis, factors such as revenue or costs
only take one value. The uncertainty and risk of a project exist when at any point of time during the
project life; there is more than one potential outcome. Therefore, we need to consider all the
outcomes that might happen to come up with solutions to prevent and mitigate risk, ensure the
project’s recoverability and profitability. Especially for the bank, as the lender, undesired outcomes
can have negative impacts on the project’s solvency and lead to investment loss. Thus, risk analysis
is very essential in the project appraisal process. The assessment of risk is also very important
information for making investment decision.
To assess the risk of a project, commercial banks often use these methods:
 Sensitivity analysis:
The project effectiveness depends much on the estimations of factors in that project. These
estimates cannot be exact especially due to future uncertainty. Thus when doing project appraisal,
we need to assess the stability of the measurements when input and output factors change. In other
words, we need to assess the sensitivity of the project to those changing factors.
In the sensitivity analysis, there often are some different situations, future risks increase
material costs, labor costs, reduce future revenues, etc. Then a new set of measurement is calculated
using the new values (NVP, IRR, PI, etc.). If the new results are still qualified, the project is
considered stable and is accepted. If not, the project is considered unstable and must be reconsidered

The goal of credit appraisal of commercial banks is to get an exact and objective conclusion
about the feasibility of the project, making a base for the lending decision, preventing potential risks
for the bank; and also not leaving out profitable projects that can benefit the bank. Project appraisal,
especially financial appraisal is considered effective when the result helps the bank make suitable
lending decision, lending amount, lending period, and interest rate, etc. In contrast, the appraisal
quality is bad if the result leads to wrong decisions such as investing in ineffective projects, loss,
hard to collect principal, or rejecting profitable projects that harms the bank profitability, losing
relationship with firms, and damaging the bank reputation.
Firms, otherwise, evaluate the quality of project appraisal by time and the utilities that they
can get. Time should be long enough for the bank to give accurate appraisal result but short enough
for the firm to catch their investment opportunities. The simple and comfortable appraisal procedures
that do not disturb the firm are also a criterion. The utilities that the appraisal process can bring to
firms are advices such as whether to invest or not, what the suitable investment scale is, etc. The
bank’s advices to firms will be useful because of its expertise and experience in the financial field. It
can help firms prevent and mitigate potential risks as well as catch the best investment opportunities.
We can generally understand from the analysis above that “the quality of credit appraisal
shows the accuracy, objectivity, rationality, and flexibility level in evaluating the investment
project”.
1.2.2. Factors that influences the quality of credit appraisal
Quality of projects appraisal is influenced by both subjective and objective factors, which
need researching and evaluating their influences in order to improve the quality of projects appraisal.
Subjective factors
These are the internal factors of the Bank, the influence of these factors on the quality of
project appraisal is decisive because the bank will do its project appraisal and its results directly
affect the lending decisions.
o Appraisal operation
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013

the reliability and objectivity of the information as well as the ability to set up a project of the
customer. If the projects are of high qualities with clear investment opportunities and a reliable basis,
the bank can conclude easily with high effectiveness. The complex project requires extensive and
newly updated knowledge of appraisers to assess comprehensively through all aspects. Thus the
more complex they are, the less accurate the conclusions might be.
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Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial
bank for Industry and Trade - Hanoi branch
2013
o Investors’ elements:
The investor is a huge factor that directly affects the quality of project evaluation generally and
financial evaluation of the project particularly in two aspects: the honesty and the project executive
management level.
In many cases, the success or failure of the project is not due to market or technical factors but
the capacity of the enterprise management and execution. An unclear organizational structure or
unclear assignment of responsibilities will obviously affect the distribution of human resources,
labor cost and project management. Furthermore, incurred costs will make the financial performance
less effective and push the business into difficulties of repaying the bank.
The investor’s honesty deeply affects projects’ quality; and has direct impacts on the project
appraisal process. Besides, failing to report the financial situation of the firm also makes it difficult
for the bank to appraise the project.
o Market elements and the economic-social impact:
Market is always an important factor that affects a project’s measurements. Market variations of
the project’s inputs and outputs can easily cause estimations errors. For example, an unexpected
increase in input prices can turn a profitable project into a bad-looking one and extremely hurt its
solvency. Positive changes in the economy will directly affect the project schedule, and operation. A
possible project can easily be changed into impossible one in a dynamic economy.
o Government’s regulations and policies:
Changes in the government’s policies and regulations have direct impacts on projects. If the
appraiser cannot predict exactly these changes, he might incorrectly conclude about the project

when the banking and financial crisis in the U.S spread to other countries in the world. Vietnam
economy’s growth rate remains modest. However, Vietinbank still manages to remain its stable and
sustainable growth. Credit operation of the bank is enhanced in terms of quality and is diversified to
best response to the clients’ demands.
In addition to traditional lending activities, Vietinbank increase operations in both
international and national interbank market to improve the efficiency of capital, contributing to
profit’s growth.
In order to better understand the operation of VietinBank in the past few years, we can
examine each service:
Borrowing activities:
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