The Role of Bank Credit in the Development of Non-State Enterprises

- Specialized forms of credit financing:

+ Financial leasing: is a form of medium and long-term credit in which the lessor transfers the right to use the asset to the lessee in return for the lessee periodically having to pay rent to the lessor. At the end of the financial leasing contract, the lessee usually has the right to buy back the asset. 4

+ Bank guarantee: Is a written commitment of a credit institution (guarantor) to the entitled party (guarantee) to perform financial obligations on behalf of the customer (guarantee) when the customer fails to perform or improperly performs the obligations committed to the guarantee recipient, the customer must accept the debt and pay the credit institution the amount paid on behalf of the customer . 5. Usually, the bank acts as a guarantor when the relationship between the buyer and seller does not trust each other and is often in the field of import and export of goods. The form of bank guarantee is very rich and diverse: credit guarantee, goods supply guarantee, payment guarantee, contract performance guarantee... credit guarantee development has met the needs of exchange and trade of goods, promoting the development of international trade.

II. THE ROLE OF BANK CREDIT IN THE DEVELOPMENT OF NON-STATE ENTERPRISES

1. Overview of non-state enterprises

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1.1. Concept of non-state enterprises

An enterprise is an economic organization with its own name, assets, and a stable transaction office, registered for business in accordance with the provisions of law for the purpose of conducting business activities. 6 SOEs are a part of the economy, based on private ownership, long-term existence, and equality.

4 Decree No. 16/2001/ND-CP dated May 2, 2001 and Decree No. 65/2005/ND-CP dated May 19, 2005 of the Government on financial leasing

5 According to Decision No. 283/2000/ND-NHNN14 on promulgating regulations on bank guarantees

6 According to Article 4 § 1 Enterprise Law No. 60/2005/QH11 dated November 29, 2005

equal before the law and have the legal and proactive profit-making nature in all production and business activities within the framework of the law . Based on the ownership form of the State-owned enterprise, the State does not provide operating capital nor re-capitalize, but the operating capital of the State-owned enterprise is capital invested by the private sector or a group of members who are organizations and individuals. This amount of money is more or less depending on the scale of the industry and the field of production and business according to the provisions of law (stipulated in the Enterprise Law). On the other hand, in its production and business activities, the State-owned enterprise must bear limited, unlimited or a mixture of unlimited and limited liability. That depends on the characteristics of each type of production and business of the State-owned enterprise in which individuals and organizations participate.

1.2. Types of non-state enterprises

According to the Law on Enterprises 2005, passed by the 11th National Assembly of the Socialist Republic of Vietnam, 8th session, on November 29, 2005 and effective from July 1, 2006, there are the following types of enterprises:

- Joint stock company : A joint stock company is a company formed from many equal capital contributions called shares contributed by shareholders who are organizations or individuals (the minimum number of shareholders is three members and the maximum number is unlimited). Shareholders are only responsible for the debts and other financial obligations of the enterprise within the scope of the capital contributed to the enterprise. Shares are shown on paper called stocks. Stocks are certificates issued by a joint stock company or book entries confirming the ownership and legal interests of one or more shares of the holder. Shareholders can own one or more shares. In case a joint stock company needs more capital for production and business, the company can issue additional debt instruments (bonds, promissory notes, etc.) or equity instruments (stocks) or other instruments to mobilize capital within the framework permitted by law.

- Company Limited :

+ Limited liability company with two or more members: Unlike a joint stock company, a limited liability company is a company established by at least two members, no more than fifty members contributing capital and having limited liability for the debts and other property obligations of the enterprise within the scope of the capital committed to contribute to the enterprise. To expand production and business activities, the company is not allowed to raise capital by issuing bonds or shares and can only increase capital by calling on members of the company to contribute more capital or admit new members or use the non-mandatory reserve fund. Members of the company are allowed to freely transfer their capital contributions to each other. When transferring to members outside the company, the consent of the group of members representing at least three-quarters of the charter capital is required.

+ Single-member LLC: A single-member LLC is an enterprise owned by an organization or an individual. The company owner is responsible for the company's debts and other financial obligations within the scope of the company's charter capital. Similar to a two-member LLC, a single-member LLC increases its charter capital to expand its production and business activities by: increasing the charter capital of the company owner or mobilizing additional capital contributions from others. In case the company's charter capital is increased by receiving additional capital contributions from others, the company must register to convert into a two-member or more LLC from the date the new member commits to contributing capital to the company.

- Partnership : A partnership is a company with at least two members who are joint owners of the company, doing business together under a common name, in addition to the joint partners, there are also capital contributing members. A partnership member must be an individual who is responsible with all of his/her assets for the obligations of the company. In case the partnership wants to increase capital

In order to expand their business activities, general partners can make additional contributions, accept additional general partners or receive capital contributions from capital contributors. New general partners must jointly bear all of the company's assets (unless otherwise agreed by that member or the remaining members). Capital contributors are only responsible for the company's debts and other financial obligations within the scope of the capital they have committed to contribute.

- Private enterprise: A private enterprise is an enterprise owned by an individual who is personally responsible for all activities of the enterprise with all of his/her assets. The owner of a private enterprise has full authority to decide on all business activities of the enterprise, the use of profits after paying taxes and fulfilling other financial obligations as prescribed by law. The owner of a private enterprise can directly or hire someone to run the business activities. During the operation, the owner of a private enterprise can increase or decrease his/her investment capital in the enterprise's business activities. The increase or decrease in the owner's investment capital must be fully recorded in the accounting books. In case the investment capital is reduced to a level lower than the registered investment capital, the owner of a private enterprise can only reduce the capital after registering with the business authority. Private enterprises are not allowed to issue any type of securities to increase capital.

- Cooperative: Cooperative 7 is a collective economic organization owned by individuals and households.

families, legal entities (hereinafter referred to as members) with common needs and interests, voluntarily contributing capital and efforts to establish a cooperative to promote the collective strength of each member participating in the cooperative, helping each other effectively carry out production and business activities and improve material and spiritual life, contributing to the socio-economic development of the country. Cooperatives operate as a type of

7 According to Law No. 18/2003/QH11 on cooperatives

Enterprise, has legal status, autonomy, and is responsible for financial obligations within the scope of charter capital, accumulated capital, and other capital sources of the cooperative as prescribed by law.

1.3. Capital sources of non-state enterprises

- Own capital: Own capital is the first condition for forming a business. According to the law, when registering to establish a company, the business owner, in addition to registering the business line, business type..., must also register the initial capital contribution. During the business operation, the business can increase its own capital. Own capital is formed differently depending on the type of business. For private enterprises, own capital is the capital that the business owner spends to do business. For joint stock companies, own capital is formed by the capital contribution of shareholders who establish the company in the form of shares. For LLCs and partnerships, the initial capital is formed by the contributions of members who establish the company.

- Borrowed capital: Businesses can borrow through commercial credit or bank credit.

+ Commercial credit: Commercial credit 8 is a credit relationship between

Commercial credit is carried out through the form of deferred payment purchase of goods, in which the lender is the seller of goods on credit because he has temporarily transferred the right to use the value of the goods sold on credit to the buyer. Conversely, instead of having to pay immediately, the buyer has the right to use that amount of money for a certain period of time depending on the credit period. Commercial credit capital has a huge impact not only on businesses but also on the entire economy. Commercial credit is a convenient and flexible method of financing in business, meeting short-term capital needs and contributing to accelerating the consumption of products of businesses.

8 Monetary-banking theory textbook, banking academy, page 20

On the other hand, it also creates the ability to expand business cooperation relationships, promoting the circulation of goods.

+ Bank credit: Bank credit 9 is a transfer relationship.

Capital between banks and other economic entities in society, in which banks play the role of both borrowers and lenders. Through the intermediary role of banks, capital will be temporarily transferred from those with excess capital to those in need of capital. This capital is mobilized from society in large quantities and for different terms, thus satisfying diverse capital needs in terms of volume, duration and purpose of use. Enterprises can borrow short-term (under 1 year), medium-term (from 1-5 years), long-term (over 5 years) with different bank interest rates and binding conditions... It has progressive characteristics and plays a role in promoting the development of enterprises in general and SOEs in particular. Using bank credit will help enterprises share some of the risks with banks. Enterprises will mobilize the necessary capital for their production and business activities. Using bank credit does not share the power of the business owner. Interest on loans is included in reasonable expenses, so it will reduce taxes for the business.

1.4. Current status of non-state enterprises in Vietnam

In recent years, when Vietnam carried out the national renovation, many new directions were opened for the national enterprises. Enterprises have developed both quality and quantity. The number of national enterprises has been constantly increasing and increasing at a very fast rate. According to the General Statistics Office, by 2007, the whole country had about 260,000 national enterprises with a total capital of about 600 billion VND. Limited liability companies accounted for nearly 47% of the number of national enterprises, private enterprises accounted for 36.4% and joint stock companies accounted for more than 15%. Currently, national enterprises are divided into many different business lines, these enterprises are

9 Textbook of financial and monetary theory, Banking Academy, page 23

a force contributing to the country's development. The development of state-owned enterprises in the fields of economic development, especially in the processing, retail and service sectors in recent times, has contributed significantly to the country's GDP. State-owned enterprises currently account for 50% of the value of the seafood processing industry and 30% of the value of the textile and garment industry. This sector also attracts more than 90% of new workers every year. However, 75% of state-owned enterprises currently have capital of less than 2 billion VND. The production technology of these enterprises is still backward and they operate mainly in low-value sectors such as processing and manufacturing.

To achieve the goal of having 500,000 SOEs nationwide by 2010, many enterprises have proposed that the State continue to reform administrative procedures to reduce inconvenience for enterprises. Enterprises have also requested that the State provide strong support in human resource training, labor supply, and economic and legal information support for enterprises.

Currently, Vietnamese enterprises are constantly developing in both quality and quantity. Up to now, the status of state-owned enterprises is as follows:

- Small capital scale : NSDs are based on private ownership of means of production, so their capital sources are limited, and they have not been around for long, so they have not had the conditions to accumulate capital. The main source of operating capital is borrowed from friends, private loans, banks and other credit institutions. However, due to the low reputation of NSDs, borrowing capital is very difficult, although there have been many documents from the government and the State Bank regulating the expansion of lending to this sector.

- The level of technology has not kept up with the world: Due to limited capital scale along with lack of information about technology, limitations in applying advanced technology, equipment is old and outdated, most of which are refurbished old machines, leading to the level of technology of state-owned enterprises being backward, investment is not synchronized, leading to poor quality goods, not meeting the needs of consumers. Therefore, the ability to compete with the economy

The national and foreign markets are still weak. In addition, some enterprises have investment plans and improvements in machinery and equipment that are unreasonable and lack calculation, leading to low business efficiency and capital recovery, so some enterprises have gone bankrupt.

- Business activities contain many risks: Because the SOEs are mainly small and medium-sized enterprises, with small production scale. The capital of SOEs is contributed by individuals and collectives, creating a high level of autonomy and dynamism. Enterprises operate to achieve the goal of maximum profit. Therefore, in the process of competition, SOEs are prone to risky activities, which are prone to risks. Therefore, SOEs need to be regulated and guided by competent authorities so that SOEs can properly apply the regulations and principles set forth by the State, not chasing after immediate benefits, causing negative effects on the socio-economic situation.

- The main business sector is consumer production and services: The non-state economy often produces for consumption and provides services, and circulates goods, so these are sectors that do not require too much capital. Moreover, they are sectors with fast capital turnover and high profit margins, suitable for the characteristics of state-owned enterprises. This has the advantage of quickly creating a large volume of goods and services for the economy, satisfying the consumption needs of the whole society. On the contrary, the disadvantages of state-owned enterprises can easily cause major crises and disruptions in the production and circulation of goods, affecting the stability of the currency.

- The level of labor skills is still low, not meeting the requirements : The level of production force of our country is still low while the development potential of our country is still great. The monopoly of the form of State and collective ownership does not allow to exploit the great potential of the country. Vietnam has more than 80 million people, in which the labor force accounts for a large proportion in society. However, the skill level of workers is still low.

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