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Dinh Vu

Economic Sector

Last updated: Friday, October 19, 2018


Channelling Funds into SMEs

Posted: Tuesday, November 07, 2017

Vietnam has up to 28 programmes in support of small and medium enterprises (SMEs), including financial support programmes and credit guarantee funds. They are seen as funding channels for SMEs but, unfortunately, credit guarantee funds do not work well.

In 2009, the Prime Minister issued Decision 60 amending and supplementing a number of articles of the Regulation on guarantee regime applicable to businesses borrowing money from commercial banks.

Accordingly, the Vietnam Development Bank (VDB) was assigned to guarantee loans for enterprises with a registered capital of at most VND20 billion or with less than 1,000 employees (the replaced regulation stipulated a registered capital of at most VND20 billion or 500 employees).

The Credit Guarantee Fund was established in 2001 with the aim of boosting capital flows for SMEs.

SMEs still find it hard to access guaranteed capital
The Vietnam Bank for Social Policies (VBSP) was assigned with the task of credit guarantee for SMEs, but it has no fund to execute this task.

Vietnam now has up to 27 credit guarantee funds established to serve as bridges for banks and enterprises. Their support still has a lot of limitations. With a low capital, which is even lower than the requirement limit of VND30 billion, mainly contributed by local budgets, joining credit institutions have a modest funding source and a limited apparatus.

Regarding the process of appraising investment projects, credit guarantee funds and commercial banks have not yet agreed on coordinating principles, conditions and procedures.

The Ministry of Finance also admitted that the credit guarantee mechanism has not been effectively implemented. 27 credit guarantee funds have a combined registered capital of VND1,462 billion and a total outstanding loan of VND361 billion for SMEs. They have to pay VND137 billion in lieu of SMEs.

Credit guarantee funds are operating ineffectively owing to current policy mechanisms. According to Article 23, Decision 58/2013/QD-TTg (Decision 58) on regulations on establishment, organisation and operation of credit guarantee funds for SMEs, the guaranteed side must use existing assets or assets which are formed and legally owned in the future and not legally banned from transactions to execute security measures for loan guaranteed at the guaranteeing side according to legal provisions on security transactions. This rule posed a severe difficulty for businesses because security assets are prerequisite for businesses to borrow money. But, in reality, when they have security assets, they will borrow money from banks.

A survey in Bac Ninh province showed that since the Decision 58 was issued, only two enterprises have been granted credit guarantee. And now, it has been merged into the local Development Investment Fund.

In fact, many obstacles prevent the guaranteeing objective of credit guarantee funds. For example, the coordination between credit guarantee funds and commercial banks remains ineffective and customers’ confidence in funds’ appraisals is still low.

Opening up fund flows
According to specialists, when the Law on SME Support comes into effect in early 2018, many difficulties need to be solved to enable credit guarantee funds to work effectively to achieve their objectives. Guarantee programmes only work well when businesses have good business plans, banks operate well, their employees are professional and capable enough to appraise borrowers when they do not have sufficient security assets. The ineffective coordination between credit guarantee funds and commercial banks cause these shortages in Vietnam. Banks lack confidence in funds’ customer assessment competences. Even some banks refuse guarantees to avoid risks.

If both sides are well coordinated, banks can make a business breakthrough when they approach funds-guaranteed SMEs, thus enhancing their competitive advantages on the market. According to experiences in Japan, they set up a risk-sharing mechanism for both credit guarantee funds and commercial banks at respective ratios of 80 per cent and 20 per cent. With this mechanism, commercial banks will be responsible for checking, supervising guaranteed loans and recovering debts. Changing the credit guarantee model is necessary. Changed contents should include centrally funded finance, insurance coverages for guaranteed loans and mutual assistance regime which is joined by business associations.

Nguyen Thanh

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