Strong Confidence Helps Unlock Cash Flows

11:28:31 AM | 9/5/2019

Increasing access to capital is the desire of not only small and medium-sized enterprises (SMEs) but also credit institutions. But how do banks and businesses get to each other?

According to the State Bank of Vietnam (SBV), in the first three months of 2019, outstanding credit in the economy rose 2.8% from the end of 2018. Credit was increased for government-directed priority areas. Specifically, credit for supporting industries climbed 3.63% (credit for prioritized supporting industries looked up 3.16%), credit for high-tech application augmented 7.25%, and credit for exporters grew 3.5%.

It is necessary to make policies and enforcement transparent to take advantage of new technological successes and gain more confidence.
However, credit for small and medium-sized enterprises (SMEs) slowed down because they typically have a small operating scale, low management and technological level, and poor business plan and strategy. Guarantee mechanisms for loans to SMEs have not worked as expected.

Furthermore, although SMEs account for more than 90% of active businesses, only about 30% have access to official bank loans and the rest must access informal capital, including exorbitant loans from the black market. Inaccessibility to bank loans is not only a hardship for SMEs, but also for the whole economy.

So, how to unlock funds for SMEs? And, if SMEs get loans, will rising pressure on deposit interest rates in 2019 affect lending interest rates, will the SBV's credit tightening plan affect credit flows to SMEs?

At a recent online meeting on “Increasing accessibility to bank loans for SMEs” in Hanoi, Mr. Tran Van Tan, Deputy Director of the SBV Economic Credit Department, said that increasing access to capital sources is the desire of not only SMEs but also credit institutions. But how do banks and businesses get to each other? Importantly, they must have faith, mutual trust, and open heart to each other and exchange more with each other. Having trust, cash flows will be opened for SMEs. The banking sector advocates coordinating closely with localities, and strengthening bank-business connectivity to increase mutual understanding and accessibility.

“Commercial banks have tried hard to reform loan procedures and access capital for customers in a quicker manner. But, their endeavors are not enough and must be faster to grasp scientific and technological progress for better business operations. Each commercial bank needs to have products suitable for target businesses to make their access more comfortable,” he added.

According to economic expert Pham Chi Lan, to increase access to capital sources, transparency is most important. “I think the first thing we need to do is to accelerate institutional reforms in a consistent and serious way. For the time being, the allocation of resources in Vietnam is currently based on priority order instead of business performance. We must change this. We must base on performance criteria and market signals as well,” she added.

In addition, capacity building needs to come from both sides - banks (lenders) and businesses (borrowers). They need to raise their internal resources. At the same time, the Government must have effective economic administration. We will fail if businesses and banks want to move fast but the government prefers going more slowly.

Using technology is an important way to increase capital access for SMEs. Mr. Pham Duy Hieu, Acting General Director of ABBank, said, Vietnam is already in the era of the Fourth Industrial Revolution. SMEs have also taken new actions and banks have to enhance their capacity and apply new technologies. As SMEs change, banks must change as well. If they fail to do so, opportunity will fall to others.

“For the time being, it is no longer a story of big one killing smaller one, faster one kills slower one. A big fish will find it harder to move than a small but fast one. And, we clearly see how Grab spectacularly grasps the taxi market in just two years. This is an opportunity for us to get to the same starting line. Whoever can take advantage of technology opportunities, they will make breakthroughs,” he affirmed.

In recent years, the banking industry has carried out many solutions and policies to support SMEs to clear hardships to access bank credit, specifically regulations on ceiling interest rates applied to development-prioritized areas, including SMEs, which enjoy interest rates 1-2% lower than other borrowers (currently 6.5% per annum) or circulars directing credit institutions to work with the Development Bank and Local Credit Guarantee Funds to lend SMEs under the guarantee of these organizations.

Other policies include a credit program specific for sectors/fields where beneficiary SMEs can borrow up to 70-80% of agricultural production project value without security assets in the form of high-tech agricultural application model under Decree 55/2015/ND-CP; an incentive lending program for clean agricultural development and high-tech agricultural application with interest rates 0.5% -1.5% lower than ordinary rates of the same maturity terms; and a lending guarantee program for SMEs borrowing up to 70% of project value of industrial parts manufacturing.

“Using technology to not only go faster but also tailor products to match each other’s needs; improving technological prowess and meeting each other’s needs will bring capital access to the same target of serving customers of Industry 4.0 together,” said Mr. Pham Duy Hieu, Acting General Director of ABBank.

Quynh Chi