Developing banking services to support small and medium enterprises in Vietnam

remittances), loans from customers and suppliers, loans from informal sources with high interest rates…

 Official capital sources: credits and investments from financial institutions (banks, funds, ...)

This is also a major difference between SMEs and large enterprises, because large enterprises rely mainly on formal sources of capital.

With limited equity capital and pressure on capital costs from loans from other informal sources, SMEs tend to rely on formal capital sources, especially capital from banks. According to a general assessment, up to 70% of SME owners invest capital through savings or loans from friends, family or non-financial organizations. In addition, in the past, it was estimated that 80% of capital provided to SMEs was bank credit capital and the capital that commercial banks lent to SMEs accounted for about 40% of total outstanding loans.

The figures below are statistics from the State Bank on credit performance for SMEs.

Table 2.7. Results in credit activities for small and medium enterprises

Unit: %

Target

2003	2004	2005
Credit growth rate for SMEs	33.6	30.4	17.8
Credit ratio to total debt	44.2	45.6	44.8
Capital mobilization growth rate	25.8	33.2	26.9

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Source: State Bank (2006), Report at the Workshop "Financial markets and SME financing" , Hanoi, November 2006.

Credit services are a type of service widely used by Vietnamese SMEs today. Among the types of short-term loans mentioned in the previous section, factoring services are currently only provided by Vietnamese banks to businesses. The introduction of factoring services is a step in diversifying the services.

Services and development of new products of Vietnamese banks in the process of international economic integration.

Vietnamese SMEs today often have a compact accounting system that is enough to handle not-so-complicated operations. That is why easy-to-use and reasonably priced services are always easily accepted by SMEs.

However, a recent survey on the status of SMEs published by the Department of SMEs (Ministry of Planning and Investment) showed that only 32.38% of enterprises said they were able to access state capital sources (mainly from commercial banks), 35.24% of enterprises had difficulty accessing it, and 32.38% of enterprises had no access.

The table below provides information on credit activities of the credit institution system:

Table 2.8. Some credit performance indicators of the credit institution system

Unit: %

Target

2000	2001	2002	2003	2004	2005	2006
Loan balance growth economy	27.69	23.24	30.39	27.96	26.24	20.00	21.40
Bad debt/Total outstanding debt	10.76	8.53	4.96	4.80	2.84	3.14	2.64
Medium and long term debt ratio Term/Total outstanding debt	35.8	38.4	41	43.50	42.70	42.22	-
Foreign loan balance ratio currency/Total outstanding debt	23.58	20.47	21	21.87	24.03	24.24	21.45
Loan balance ratio by type of credit institution
- State Commercial Bank	76.63	78.99	78.99	80.53	79.65	77.46	68.89
- Joint Stock Commercial Bank	9.31	9.36	9.36	9.32	10.74	12.06	19.31
- NHLD and bank branches foreign goods	12.33	10.08	10.08	8.57	8.13	8.91	9.45
- People's credit fund	1.37	1.21	1.21	1.23	1.31	1.32	1.37

- Other credit institutions

0.35	0.35	0.35	0.34	0.18	0.25	0.98
Loan ratio by industry economy
- Agriculture and forestry	26.72	26.81	29.65	29.41	29.66	29.59
- Industry, construction	37.36	38.37	39.36	38.92	39.31	39.66
- Trade and services	25.63	24.28	22.46	22.93	23.20	17.63
- Other industries	10.29	10.54	8.54	8.75	7.82	13.12
Loan ratio of members economic part
- State economy	44.93	47.45	43.99	43.37	42.48	43.04
- Collective economy	0.64	1.26	3.90	5.36	7.00	7.86
- Private and public enterprises joint stock company, limited liability company	16.46	12.54	15.62	16.73	18.60	19.75
- Individual economy	23.27	25.67	22.80	22.09	20.03	18.55
- Foreign invested economy outside	14.70	13.08	13.70	12.44	11.89	10.80

Source: State Bank of Vietnam (2007), Strategic orientation and solutions for developing banking services in the period 2006-2010 , Industry-level scientific research topic.

The above indicators show that the growth of outstanding loans to the economy has shown signs of decreasing, although it is still above 20%. A good sign is that the ratio of bad debt to total outstanding loans has decreased from 10.76% in 2000 to 2.64% in 2006. In addition, commercial banks continue to be successful in increasing the proportion of outstanding loans when compared to other types of credit institutions. The proportion of loans to private enterprises, joint stock companies and limited liability companies (most of which are SMEs) has marked a steady increase over the past 5 years.

Factoring services are now provided by some Vietnamese banks (ACB, VCB, Techcombank...) to businesses to support business and import-export activities. Factoring is now often

classified into recourse-non-recourse factoring, notified-non-announced factoring, domestic-import-export factoring. One of the reasons for the popularity of this service is its ease of use and its procedures are not too cumbersome or complicated. This is also one of the basic factors that makes a group of banking services become close and easy to use for SMEs.

Bank guarantee services have also developed rapidly, the annual growth rate of guarantee sales and outstanding guarantee loans of state-owned commercial banks in the period 1998 - 2002 was 54.25% and 43%. Regarding the guarantee structure, in the early years it was mainly loan guarantees, in recent years the large proportion is contract performance guarantees (about 50%), followed by guarantees for opening deferred letters of credit (about 30%), and bid guarantees (over 10%).

Although financial leasing services have been present in Vietnam, they have not yet developed strongly. According to experts [14], very few Vietnamese SMEs have been interested in this service in the past. While in developing countries the proportion of the financial leasing market compared to the credit market accounts for about 15%, in Vietnam this ratio is only about 1.4%. Thus, for every 100 enterprises, only nearly 1.5 enterprises (on average) use financial leasing services. Among the problems and difficulties encountered when implementing this service, we can mention the regulations related to vehicle circulation (in the case of assets being means of transport), including circulation inspection, use of notarized registration papers, etc.

In 2010, Vietnam will fully open its financial leasing activities according to its WTO commitments. According to experts, the integration of financial leasing activities will lead to many foreign companies and corporations participating in establishing financial leasing companies in Vietnam. Even corporations trading in industrial products will open financial leasing companies to support product distribution channels. It is predicted that this will be a rapidly developing market with many challenges in terms of capital and services for domestic financial leasing companies [15].

The table below summarizes the performance of financial leasing companies.

Table 2.9. Activities of financial leasing companies

Unit: %

Target

2002	2003	2004	2005	2006
Equity growth	12.3	5.2	19.5	27.7	-2.0
Growth in capital mobilization and borrowing	85.1	68.8	60.3	31.4	13.6
Growth in outstanding lease debt	65.7	50.5	55.6	30.2	13.1
Bad debt ratio	2.95	2.52	4.16	5.56	4.86

Source: State Bank of Vietnam (2007), Strategic orientation and solutions for developing banking services in the period 2006-2010 , Industry-level scientific research topic.

Recently, the results of a survey conducted by experts from the Multilateral Trade Support Project Mutrap II (funded by the EU) showed that 45% of individual and corporate customers responded that they would switch to borrowing from foreign banks instead of borrowing from Vietnamese banks. In the case of choosing a bank to deposit money, more than half of customers intend to deposit money in foreign banks, especially deposits in foreign currencies. With corporate customers accounting for about 65% of outstanding loans of Vietnamese banks as at present, of which half of customers decide to switch to foreign banks, this will cause major, negative impacts on Vietnamese banks.

First of all, it is necessary to mention the lack of understanding of SMEs about the credit mechanism of banks. Banks are also businesses and are responsible for depositors and service users, so customer assessment and appraisal always has a specific process and steps. Some new businesses entering the market are still hesitant and afraid of the cumbersome procedures set by banks. Many business loan applications do not meet the requirements set by banks. Even the information provided by businesses is not enough for banks to have an overall picture.

on the business and financial situation of the enterprise. The legal capacity documents are often only at the minimum level such as charter, business registration and lack many other documents such as minutes of the board of members electing the director, documents on capital contribution procedures. Personal and legal assets are mixed, lacking transparency.

In many cases, the information provided by the enterprise is not enough for the bank to make decisions on providing credit. For the bank, the important factor is that the credit is used effectively by the enterprise on the basis of which the enterprise can repay the loans as committed in the credit contract. Mortgages and guarantees are essentially a backup in case the enterprise is unable to pay. The fact that the enterprise's accounting and bookkeeping system is incomplete and lacks transparency has been a major obstacle in accessing bank credit. In addition, the weak financial situation and financial coefficients that are not guaranteed according to the bank's assessment are also an obstacle.

Next, the business plan of the enterprise is not convincing to the bank, or is also known as lacking feasibility. The business plan may still be subjective to the enterprise, not taking into account market factors and other objective factors. Many business plans are presented sketchily, lacking necessary related information. In addition, the financial plan of the enterprise in general and the financial plan of each plan in particular are not clear and coherent, in which the cash flows, capital turnover cycles and debt repayment sources are not identified. The collateral also does not have enough valid documents.

The above factors are created because businesses are not managed and operated systematically, many businesses operate unprofessionally and do not have a clear business development strategy.

The decision of banks to provide credit to businesses also depends on the mutual trust built in the long-term relationship. Businesses with long-term relationships and good credit relationships with banks are often considered for more favorable credit. Many businesses only when necessary

New borrowers come to the bank, in which case the bank has to set up a new customer profile and thus the credit granting process will take longer.

Obviously, for businesses with loss-making production and business situations, violating commitments to banks regarding the purpose of using loan capital or intentionally delaying debt repayment, and incurring overdue debt, it will be difficult to convince banks to lend.

Regarding the financial situation of enterprises in general and SMEs in particular, the equity capital of Vietnamese enterprises in general is still modest, with an average of about 10 billion VND in the period 2001-2003, most of which was formed from borrowed capital. In addition, the average debt balance index in this period was above 2 times, in which the index of the group of state-owned enterprises was above 2.5 times. The indexes of the group of non-state enterprises (Table 2.7) can also be considered as the indexes of the group of SMEs because the majority of non-state enterprises are SMEs and vice versa. The Vietnam Chamber of Commerce and Industry (VCCI) has provided aggregated data (Appendix 2 and 3) on the financial situation by industry and type of enterprise to help us fully assess and perceive Vietnamese SMEs.

Credit guarantee fund

In analyzing and evaluating the current status of credit access of SMEs, we also need to mention the process of establishing Credit Guarantee Funds for SMEs in localities. To implement the provisions of Decree 90/2001/ND-CP, the Prime Minister issued Decision 193/2001/QD-TTg promulgating the Regulation on establishment, organization and operation of Credit Guarantee Funds for SMEs. The Ministry of Finance and the State Bank have issued circulars guiding the implementation. However, the progress of establishing the Fund in localities is still very slow. Since Decision 193/2001/QD-TTg took effect, only 3 provinces have established this fund: Tay Ninh, Tra Vinh and Dong Thap. Some provinces and cities such as Hanoi, Ho Chi Minh City, Thai Nguyen, Quang Ngai, Bac Giang, Thanh Hoa, Binh Phuoc, Vinh Phuc, Lam Dong, Binh Dinh... have just established a preparatory committee to establish the Fund.

TABLE 2.10. BALANCE OF DEBT OF ENTERPRISES

Year 2001			2002			2003
							Equity have	Liabilities	Balance of debt (time)	Equity have	Liabilities	Balance of debt (time)	Equity have	Liabilities	Balance of debt (time)
Business average							10.0	21.0	2.1	9.4	18.5	1.96	8.5	18.8	2.2

 State-owned enterprises							39.0	109.0	2.79	47.2	120.0	2.5	44.3	145.6	3.2
 Non-state enterprises							1.96	2.97	1.51	2.1	3.2	1.52	2.8	4.7	1.68
 Business outside	career	Have	capital	head	private	water	79.5	95.7	1.2	68.8	84.4	1.22	73.8	85.9	1.16

Source: Pham Xuan Hoe (2005), Operating environment of Vietnamese commercial banks - opportunities and challenges , Workshop documents "Building a strategy for developing banking services to 2010 and vision to 2020".

Developing banking services to support small and medium enterprises in Vietnam - 12

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