Developing banking services to support small and medium enterprises in Vietnam

For banks, in order to develop sustainably, financial capacity plays an important role. Most countries and economies have set minimum regulations on registered capital of banks. In many cases, after a period of initial operation, small banks are advised to merge or increase capital to improve their capacity to provide services and utilities as well as ensure the rights of depositors and service users.

In the process of global integration, some medium-sized banks have chosen a development strategy through building a team of good human resources, improving management capacity and risk management. However, if considering the theoretical basis of the advantages brought by scale, these banks can only target SMEs in large economic centers or groups of SMEs with high profits. Limited financial capacity has prevented these banks from deploying a wide network in remote areas.

From the perspective of banks, service prices are the most important factor affecting the provision of banking services to SMEs. The scale of transactions of SMEs is small, so the ratio between transaction costs calculated on the value of the loan/transaction value becomes much higher compared to large-scale transactions. This creates a big challenge for banks in diversifying services and building competitive fees for the services provided. This is also the starting point for solutions (mentioned in chapter 3) to develop banking services to support SMEs.

Next is the need to apply modern technology in the banking sector. In addition to helping banks better manage the operations of the entire system and quickly provide solutions, the important factor that modern banking technology brings is convenience and new services with competitive fees. Information technology also helps banks improve their risk management capacity for each customer and the entire system.

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Understanding the specific operations of SMEs plays a key role in creating success for banks serving SMEs. In many

There are banks in the world (private or government-owned) that specialize in serving SMEs. Understanding the operations and characteristics of SMEs has helped these banks develop credit processes and banking services (or service packages, solutions) that are suitable for the needs of SMEs. Information about the operations of SMEs is also improved. Banks specializing in serving SMEs often establish close relationships with associations and social organizations of SMEs to provide support and better information.

In some economies, the trend of “criminalizing” economic relations, especially credit relations, has partly created a “cautious” trend on the part of banks. For this reason, the credit profiles of start-up businesses or businesses that do not have enough collateral may encounter difficulties when banks consider granting credit.

From the perspective of SMEs, the factors affecting their access to banking services always originate from their limited scale and resources. This starting point also leads to characteristics that directly affect their access to banking services, including:

 Lack of understanding of banking services - facilities and related procedures and regulations

 Limited capacity to develop investment projects and business plans

 Lack of collateral when accessing credit

 Limited risk management capacity

 The financial-accounting system is still inadequate, lacking reliable financial reports.

 Other related factors

The first factor to consider is the knowledge and information of SMEs about banking services and access procedures. SMEs in developing economies often face this problem more than SMEs from developed economies. The main reason is that in developed economies, information about banking services is widely disseminated through mass media, and on

Most of all, this information and knowledge has been disseminated at different levels of training.

Limited financial and human resources have to some extent affected the way businesses are run. In many economies around the world, including developed economies, many SMEs are managed like “small family businesses” and as a result, internal management systems such as human resource management and especially the financial-accounting system appear unprofessional.

The lack of a professional financial-accounting system often leads to the situation where SMEs do not have standard financial reports on which banks can base their service provision decisions. This is one of the factors that SMEs themselves can improve their situation. According to many experts, this can be considered a subjective factor that plays a leading role in enhancing SMEs' ability to access credit and use banking services.

From the perspective of macro management, business environment and policy mechanisms that directly impact the provision of banking services to SMEs, we can see the following basic factors:

The business environment includes institutions and legal regulations that play a fundamental role on which banks - which are also enterprises - and SMEs coexist and develop. "What environment - what enterprise" is a saying that shows the relationship and direct impact of the business environment on the formation and development of the business community.

Next, we must mention the impact of legal regulations in this field . Currently, legal regulations in the banking service sector are increasingly being improved, however, these regulations are not yet consistent and do not meet the requirements of reality. A very important point is that the banking service sector is closely related to other areas of socio-economic life. Regulations in the Civil Code, Land Law, ... all have an impact on the provision of banking services to SMEs.

In many economies around the world, after realizing the importance of SMEs in overall socio-economic development, governments have proposed strategies expressed through legal regulations and specific action programs to directly impact the development of SMEs, including measures to increase SMEs' access to banking services.

In general, the prices of all types of services have gradually shifted to being determined based on the principle of supply and demand. Interest rates on deposits and loans (both domestic and foreign currencies) have been basically liberalized. Lending interest rates are implemented based on the principle of agreement between the bank and the customer, based on the assessment of the efficiency and risk of the loan project, regardless of the customer. Fees for other types of banking services are also determined based on supply and demand.

1.4. INTERNATIONAL EXPERIENCE IN DEVELOPING BANKING SERVICES TO SUPPORT SMALL AND MEDIUM ENTERPRISES AND LESSONS FOR VIETNAM

In countries around the world, depending on the level of economic development, each different stage has different solutions in developing banking services in general and banking services for SMEs in particular.

Currently, experts around the world have a common view that SMEs in less developed countries have more difficulty accessing banking services compared to SMEs in developed economies.

This section will present experiences in three economic regions with different levels of development, including the US and Europe, Africa and Taiwan (an economy that has many similarities with Vietnam in the process of economic development). The experiences include both successes and failures to help us gain a deeper understanding of this issue. The entire analysis in this section will provide a comparative picture between Vietnam and other economies, on that basis, outline a suitable roadmap for implementing solutions.

Below are the general assessments and conclusions of international experts on banking services for SMEs in developing economies [38].

Common features include:

 A large number of SMEs in developing countries currently maintain business activities outside the banking system and finance is in many cases arranged internally, through acquaintances and family.

 The formal financial system is dominated by commercial banks, especially in transition economies and low-income developing countries. Therefore, business activities rely heavily on the banking system.

 Because the entire banking system is not yet strong, credit for SMEs in general is still limited and the cost of accessing these credits is quite high. A recognized reality in most developing economies is that limited financial resources and high costs of accessing these financial resources are the main obstacles in providing finance to SMEs. One of the reasons for this situation is that a large amount of capital has been provided to large enterprises. In addition, with the nature of providing short-term capital, bank capital tends to be for trade rather than investment.

 Although SMEs are now large in number and play an important role in creating jobs, they still face difficulties in accessing formal financial sources. In some countries, access to financial sources with competitive interest rates is limited to a number of high-tech companies and lending rates for SMEs remain high.

 In many developing economies, banks tend to lend too much to the state sector and the government due to low risk and high returns, so the amount of capital left for SMEs, especially non-state enterprises, is not large and thus increases the cost of accessing these financial sources.

 It is important to note that financial sector reforms are urgently needed in many economies. However, these reforms alone are not sufficient to ensure SMEs’ access to long-term finance. The absence of such reforms may require increased efforts at the micro level to improve the capacity and efficiency of lending to SMEs. Macro-level reforms and micro-level initiatives need to be undertaken simultaneously.

The cause of the above problems is that banks are reluctant to provide banking services to SMEs for the following reasons:

 SMEs are considered a high-risk borrowing group due to lack of assets and capital, and vulnerability to market changes;

 The lack of accounting monitoring systems, appropriate financial reports and business plans by SMEs has hindered banks and investors from assessing the financial needs of potential SMEs;

 A very important issue that will be discussed later is the high administrative and transaction costs of investing and lending to SMEs, which makes serving SMEs unprofitable;

From the above observations, commercial banks generally tend to be biased towards lending to large enterprises because these enterprises can have better business plans, have been credit rated and can provide more reliable financial information.

In many parts of the world, when banks lend to SMEs, they often tend to charge additional fees based on their calculations of the possible risks to these businesses.

Many governments and international financial institutions are trying to look at the fundamental issues in SMEs' access to finance - the problem of high risks and transaction costs - and on that basis consider the possibility of creating preferential credit programs or loan guarantees.

However, in some cases these programs can lead to loan defaults or fail to reach the intended audience.

In Africa, examples of such failed programs include the Sub-Saharan African credit programs of the early 1980s, which were initiated by development finance institutions. The original objective of these programs was to provide long-term credit and financial services to priority rural areas. The policies adopted in these programs included government intervention in the flow of credit through a system of grants, interest rate caps, credit rationing, etc. Banks thus had no incentive to improve their operational efficiency or their ability to assess risks and monitor loans. All of these factors contributed to poor overall performance of these banks. In some of the countries in this example, the proportion of non-performing loans reached 90% of total bank loans.

Regarding the experience in the US and European Union member countries, experts have made comments and lessons including:

 Banks need to provide and develop banking services for SMEs while taking into account the risks and costs associated with providing these services.

 A large number of banks have developed separate strategies to serve SMEs. These strategies are characterized by a shift from focusing on developing individual products to providing specialized service groups for SMEs.

The above strategies have in fact ensured the improvement of relationships between banks and SMEs and thereby increased the efficiency (profitability) of providing services to this group of enterprises.

Solutions that have been adopted by banks in this bloc to better serve SMEs include:

 Minimize the lack of information about SMEs and risks through:

o the use of credit scoring systems;

o use information provided by outside parties;

o risk assessment for SME owners;

o build cost and price systems based on risk levels

o share risks with third parties

o Establish specialized support departments for high-risk business groups, especially start-ups

 Reduce lending costs through:

o application of modern information technology;

o build appropriate organizational structure and simplify lending procedures

o develop new products that better suit the needs of SMEs

o Improve service delivery to SMEs through training of bank staff and segmentation of customer groups

o Partner with SME organizations and business development service providers to reduce risks and costs and integrate financial and non-financial services

In addition, in order for banks to limit the lack of information about SMEs and enhance risk management, there is a need for two infrastructure systems including:

 Banks need to have effective machinery and mechanisms to be able to process and analyze large amounts of data information to support the decision-making process.

 There is a need for an appropriate infrastructure for the entire financial market to be able to provide reliable and timely financial information.

Regarding the reliable financial information of SMEs, one of the reasons why banks hesitate to lend to SMEs is that these organizations cannot fully assess the risks due to the lack of reliable financial information. In stable and developed financial markets, credit providers often require

Developing banking services to support small and medium enterprises in Vietnam - 7

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