Transparency Facilitates Borrowing

 

An ILO research project released in January 2010 found the survival rate of newly established SMEs in Vietnam at 50 %. This means that half of new enterprises have to close down their business. About 25 % of newly formed SMEs disappear within five years of start-up. However, the number of newly founded enterprises is rapidly increasing in Vietnam. As quoted by the Ministry of Planning and Investment, there were 380,000 newly established enterprises in Vietnam in 2008, and 460,000 in 2009. Compared to just 30,000 new enterprises in 2000, the number of newly established enterprises grows vibrantly every year in Vietnam.

 

With a view to enhancing the efficiency and operation of SME support programmes as well as assessing the implementation and application of financial policies aiding SMEs, VCCI and the Institute for International Studies and Training (IIST) recently held a seminar to introduce financial sources for SMEs. According to Mr Tatsuya Hoshino, Research Director of Vietnam Institute of Economics, to get loans from banks, it is necessary that enterprises provide financial information and develop good relationships with other enterprises as well as with banks. The more transparent the information is, the greater their chances to get loans.

 

A new trend is forming. That is, a number of SMEs work with a number of banks while still maintaining their relation with main banks. Very small-scale enterprises with smaller numbers of employees tend to be more reliant on loans from banks, especially in the case of SMEs with less than 20 employees, 50 % of their capital is supplied by banks.

 

In terms of conditions to get loans from banks, SME loan applications are sometimes refused. This all depends on the SME’s business conditions and individual bank standards. For instance, the rate of overdue debts increases or there are changes in financial policies. It is, therefore, vital that SMEs closely observe the business environment in order to conduct loan procedures at the best time.

 

However, according to Mr Tatsuya, being too dependent on credit from banks may lead to insustainability in enterprise management. To avoid this, SMEs need to maintain good business relations with banks.

When applying for loans from banks, SMEs are often requested to either provide collateral like land or mortgage loans for the representative. 75 % of SMEs provide banks mortgaged assets like land. 80 % secure their loans by mortgaging their loans. The reason for these requirements lies in the fact that banks want SMEs to be aware of their responsibility towards these loans and to avoid unethical business. Moreover, banks do not have accurate information about the capability to return the loans of SMEs. Therefore, they can request the endorsement of a third party to avoid a risky loan. SMEs with little potential and a small number of employees will find it hard to apply for credit from banks.

 

Currently, there is a method which draws attention of enterprises and banks. It is loans secured by available assets, including merchant accounts, goods and even personal assets like machines and equipment used for business.

 

This method is being successfully applied and is expected to be widely applied as an appropriate mode to mobilize capital for SMEs. In addition, some SMEs use financial organisations which are not banks in order get credit. Vietnam is currently home to a number of funds like Credit Guarantee Fund, Fund for development of science and technology and other funds. These funds support SMEs with low interest rates and do not require mortgages. However, it is compulsory to provide adequate information in order to get loans from either banks or these funds.

 

So SMEs can operate well after being established, Mr Tatsuya believes that local banks need to maintain the role of “main bank”, continue to offer loans and provide support services, even when SMEs temporarily face business decline or loss. To this end, it is important that SMEs try their best to maximise their profit and pursue higher objectives. SMEs need to have specific orientation and business views in order to continuously innovate and develop.

 

SMEs which have not conducted IPO need not submit financial reports. SMEs, however, still need transparency in management and business reports and have to periodically submit reports on their capital and finance condition to the banks. These reports are of extreme importance to the banks in their study and support activities.