Developing banking services to support small and medium enterprises in Vietnam

mobile banking...), derivative services (Futures contract, Option, Swap,...), while, as mentioned above, the law on banking services has revealed many "gaps", such as the lack of legal documents on new types of services, new methods of service provision. This situation not only hinders the business activities of credit institutions (because when wanting to provide these services, credit institutions must ask for permission from the State Bank to pilot the implementation), but also affects the management activities of the State Bank (the State Bank does not have enough legal basis to perform the inspection and supervision functions). To a certain extent, the lack of legal documents mentioned above also affects the implementation of Vietnam's obligations on policy transparency in bilateral and multilateral trade agreements (such as BTA, AFAS, WTO).

Third, the law on banking services lacks regulations governing some methods of providing banking services such as cross-border, using services abroad, and physical presence. Current regulations of the law on banking services mostly focus on regulating the method of providing banking services through commercial presence, without any regulations governing the provision of banking services through other methods. Meanwhile, today, with the development of information technology, the provision of services in general and banking services in particular via the Internet has become quite popular. Through the Internet, foreign service providers can completely provide banking services to customers in Vietnam and vice versa, Vietnamese banking service providers can also provide banking services to customers abroad without establishing a commercial presence. Therefore, without regulations governing these new service provision methods, it is difficult for the State Bank to effectively perform its supervisory and inspection role in the provision of services by credit institutions using these new methods.

Fourth, the Law on Credit Institutions has not clearly defined the State Bank's authority to manage banking services. The practice of implementing the Law on Credit Institutions and the guiding documents of the Law in recent times shows that the scope of regulation of the Law is limited.

Maybe you are interested!

The Law is not consistent with the practice of State management of banking activities. According to the provisions of the Law on Credit Institutions, the State Bank is the competent authority to grant licenses for the establishment and operation of credit institutions and to grant banking licenses to other organizations (other than credit institutions). However, the granting of banking licenses to other organizations (other than credit institutions) has not been implemented in practice for the following reasons: (i) The Law on Credit Institutions does not clearly distinguish between banking activities (and activities including receiving deposits and using these deposits for lending and payment services) and specific banking services (which banks and other organizations that are not credit institutions are allowed to perform); (ii) There is no document guiding the implementation of the Law on granting banking licenses to other organizations; (iii) The Law does not have specific provisions on the types of banking services that other organizations may be allowed to perform; (iv) The Law does not have any regulations on safety supervision for other organizations with banking activities. The above situation has reduced the effectiveness of the State management of the State Bank. In fact, there are many other organizations with banking activities (even banking activities are the main activity) but are not licensed, managed, inspected and supervised by the State Bank such as Postal Savings, Small and Medium Enterprise Guarantee Fund, etc.

Fifth, the law on banking services has not clearly defined the scope of operations of each type of bank. According to the current banking law, banks include commercial banks, investment banks, development banks, policy banks, and cooperative banks. However, the regulations on the operations of these types of banks do not distinguish between each type of bank. In other words, these types of banks provide the same type of banking services. This regulation is not in line with international practice and makes the distinction between types of banks meaningless, does not promote the diverse development of types of credit institutions and specialized banking services of each type of bank. This inadequacy also makes the banking market in our country not have other types of banks (other than commercial banks).

commercial banks) such as investment banks, development banks, and true cooperative banks.

The above mentioned shortcomings of the law on banking services, if not promptly resolved, will certainly hinder the development of banking services and contribute to reducing the competitiveness of Vietnamese credit institutions. Therefore, perfecting the law on banking services, overcoming the above mentioned shortcomings to actively support the development of banking services of credit institutions is an urgent requirement.

The legal regulations on banking services applicable to SMEs are detailed in the attached Appendix. At the 2006 Year-end Conference addressing legal regulations as well as mechanisms and policies in the field of banking services for SMEs, the State Bank of Vietnam made the following general assessments:

Capital mobilization mechanism:

Currently, the State Bank has directed credit institutions to diversify capital mobilization forms to attract the highest level of capital sources in society, especially medium and long-term capital sources to expand lending to meet the increasing capital needs of the economy. As a result, the mobilized capital of the banking system has grown at a fairly high rate, averaging about 25%/year.

The State Bank actively develops relationships with international financial and monetary organizations and foreign banks to mobilize external capital to finance Vietnamese SMEs with a total project value of more than 30 million USD such as the Rural Enterprise Finance Project funded by ADB and WB, the Japanese ODA Loan SME Financing Project through JBIC, and the Vietnam-EU SME Development Fund (SMEDF).

Credit granting mechanism:

Loan mechanism:

Commercial banks (and credit institutions) are autonomous in considering lending all capital needs for investment, production and business of enterprises that are not prohibited by law, and agree with enterprises on lending capital secured by assets or not secured by assets. Loan terms, loan interest rates and loan amounts are agreed upon by credit institutions and enterprises in accordance with investment projects and production plans.

business performance, debt repayment capacity of enterprises and financial capacity of credit institutions.

Lending methods are suitable for production and business conditions and capital needs of enterprises such as lending according to credit limits for enterprises with regular lending relationships, lending short-term, medium-term and long-term capital for investment projects so that enterprises can proactively raise capital in production and business, for large projects that exceed the capacity of a credit institution, credit institutions will coordinate to provide co-financing loans.

Credit institutions are allowed to decide to exempt or reduce loan interest payable for customers who have suffered property losses leading to financial difficulties. The level of exemption or reduction of loan interest is appropriate to the financial capacity of the credit institution.

Other credit granting mechanisms:

Along with traditional lending, the State Bank has issued mechanisms on other forms of credit such as guarantees, financial leasing, discounting of export documents... to create a legal corridor for credit institutions to expand credit channels for SMEs, creating conditions for these enterprises to access bank credit capital more conveniently and diversely, in accordance with the characteristics of their operations.

 Regarding guarantee operations: credit institutions are allowed to provide various types of guarantees for enterprises, including loan guarantees, payment guarantees, bid guarantees, contract performance guarantees, product quality assurance guarantees, payment account guarantees and other types of guarantees. Forms of guarantees include guarantee contracts, letters of guarantee and other forms that are not prohibited by law and in accordance with international practices; guarantee fees are agreed upon by both parties. The level of guarantee of a credit institution for a customer shall not exceed 15% of the equity capital of that credit institution; for the credit needs of enterprises, both lending and guarantee can be combined at the same time.

 Regarding financial leasing: financial leasing companies provide medium and long-term credit in Vietnamese Dong and foreign currencies by leasing machinery, equipment, means of transport and other assets to enterprises.

other assets as required by the enterprise. At the end of the lease term, the enterprise has the right to buy back or continue to lease the leased assets. Because the leased assets are owned by the financial leasing company, the enterprise does not have to take measures to mortgage or pledge the assets when leasing, so this form of credit is suitable for the financial conditions of Vietnamese SMEs that do not have enough assets to mortgage or pledge.

 Regarding credit granting in the form of discounting export documents: for export enterprises when needing capital to continue production and business, credit institutions consider discounting (buying back) the export documents of the enterprise that have been implemented, the enterprise receives Vietnamese Dong or foreign currency.

 Regarding derivatives: Currently, the State Bank has a legal framework for credit institutions to conduct interest rate swap transactions with enterprises to help credit institutions and enterprises prevent interest rate risks, fix production costs to stabilize production and business activities. In addition, the State Bank allows a number of commercial banks to pilot specific derivative transactions such as forward transactions, options transactions, and interest rate swaps between two currencies.

Loan guarantee mechanism:

Credit institutions and enterprises can freely agree and choose to secure loans by appropriate measures (pledge, mortgage, guarantee with assets of a third party or guarantee with assets formed from the loan capital). Enterprises can be selected by credit institutions to be granted loans without asset security, or loans secured with assets formed from the loan capital with more favorable conditions.

For some borrowers, credit institutions provide loans without collateral: up to 30 million VND for farm owners; up to 50 million VND for enterprises producing and trading aquatic breeds; up to 100 million VND for cooperatives providing services of supplying materials, plants, and breeds for agricultural, forestry, fishery, and salt production; up to 500 million VND for cooperatives producing export goods and doing traditional occupations.

Interest rate mechanism: The lending interest rate is agreed upon by the credit institution and the customer based on the supply and demand of capital in the market and the customer's creditworthiness. For subjects in disadvantaged areas, state-owned commercial banks lend at preferential interest rates about 15 - 30% lower than the normal lending interest rate. Support mechanism:

In addition to innovating credit granting mechanisms and policies, the State Bank has directed credit institutions to implement solutions to facilitate lending procedures, enhance payment services, and provide consulting services for businesses to borrow capital to support SMEs in accessing credit capital and other banking services, including continuing to improve lending processes and procedures such as issuing credit handbooks, applying credit scoring systems for businesses to standardize customer risk assessment methods, and issuing credit operations procedures according to ISO standards. Posting and informing customers about bank loan procedures and processing times. Organizing contact with SMEs to grasp their borrowing needs and removing difficulties and obstacles in credit relations with businesses to expand credit investment safely and effectively. Actively expanding the network of branches and transaction offices to attract capital, expand lending and provide payment services to businesses. Guide credit institutions to contribute capital to establish a credit guarantee fund for Vietnamese enterprises.

2.4. THE ROLE OF ASSOCIATIONS, INDUSTRIES AND OTHER RELEVANT ORGANIZATIONS

As we have analyzed above, in the overall interaction between factors in the development of banking services for the development of Vietnamese SMEs, we can see that associations and professional organizations have and will always play a very important role. This is not only true for the situation in Vietnam in particular but also true for other countries in the world in general, including developed countries.

It is easy to see that banking service providers have a different approach to SMEs than to large enterprises. Because of the characteristics of SMEs, there is always a need for "support" or "building trust".

in relations with service providers. Here we see a reality that SMEs are established and withdraw from the market or cease operations is quite normal, so service providers themselves always need a representative organization or a group of SMEs (by location, by industry...) to get more information about SME customers. Specifically, we can see that where the role of industry associations is promoted and developed, credit activities are better implemented.

Some specific support contents of associations and related industry organizations for SMEs include:

- Support SMEs with information, helping them access information on policies, laws, business information, market information, etc.

- Training for SMEs on issues related to their business operations, including issues of production management, human resources, accounting-finance, business planning...

- Introduce trade and investment partners and support SMEs to access financial resources.

- Make recommendations to the State to create a favorable environment for production, business and consumption of domestic and foreign products.

Currently, a number of industry associations and the Vietnam Association of Small and Medium Enterprises have signed cooperation agreements with a number of banks and credit institutions, which include support for member businesses in accessing and effectively using banking services.

2.5. OPPORTUNITIES AND CHALLENGES FOR PROVIDING BANKING SERVICES TO SMALL AND MEDIUM ENTERPRISES WHEN VIETNAM BECOMES A MEMBER OF THE WORLD TRADE ORGANIZATION

In this section, we will discuss the issue of access to banking services for SMEs in the context of Vietnam becoming a full member of the WTO. In that context, the following basic issues arise for the relevant parties:

 Vietnam will have to build a legal system and adjust current legal regulations in accordance with the spirit of the WTO.

 Vietnamese banking service providers will face fiercer competition in the domestic market due to the presence of foreign service providers. Foreign banks present in Vietnam will also expand their operations and enhance the services provided.

 Vietnamese enterprises in general and Vietnamese SMEs in particular will have to quickly improve their capacity to compete with foreign enterprises entering the Vietnamese market. Improving competitiveness through good corporate governance and market development, and applying advanced science and technology will also create favorable conditions for Vietnamese SMEs to better access services from domestic and foreign suppliers.

On January 4, 1995, the WTO accepted Vietnam's application for WTO membership for consideration. In late 2001 and early 2002, the State Bank of Vietnam officially sent the first offer on banking services, thereby officially entering the negotiation phase on market opening for the banking sector. Based on the WTO's principles on trade in services, the offer on banking services took the Vietnam-US Trade Agreement (BTA) as a basis, making commitments according to WTO regulations for negotiation. Becoming a member of the WTO depends on the negotiation process with the remaining members, on the level of Vietnam's acceptance of "opening up".

Currently, according to the requirements of the Doha Round, the conditions for joining the WTO are increasingly strict, with many difficult demands from developed countries. Some countries, when joining the WTO, must sign agreements with other countries to meet some separate requirements, called WTO plus (WTO+), which requires Vietnam to accept and make concessions to join the WTO. To reach an agreement, the parties must negotiate together. The negotiation rounds are intellectual battles in which participating countries must bring benefits at all costs.

Developing banking services to support small and medium enterprises in Vietnam - 14

Comment