SMEs Face Difficulties in Accessing Bank Loans

SMEs Face Difficulties in Accessing Bank Loans

Currently, small- and medium-sized enterprises (SMEs) account for up to 96 per cent of total existing enterprises and they contribute to more than 20 per cent of the country’s gross domestic product (GDP) and create over one million jobs for labourers. However, local SMEs are facing difficulties in approaching capital sources, especially bank loans, for boosting production.

Ten years ago, Vietnam had only around 100 SMEs. Now, the figure has risen to tens of thousands. In Hanoi alone, each month the city sees 300 more SMEs, bringing the total number of this kind of enterprise to around 17,000 as at the end of 2004.

The ratio of SMEs accessible to bank loans has increased to over 30 per cent, compared with 10 per cent three years ago. However, the current rate is considered very low. Commercial banks always have a thorough look at those companies before deciding to lend to them.

According to Director of International Business & Public Policy Centre of the US Johns Hopkins University, Prof. Roger Leeds, the phenomenon happens in almost all developing countries like Vietnam, in which State-owned commercial banks give priority to State-owned enterprise (SOEs) while private companies face difficulties in accessing the loans.

SMEs want to borrow mid- and long-term loans from local banks. However, those banks often offer them short-term loans, ask for collateral and charging high interest rates on their lending. Moreover, the most believable collateral is certificate of land use rights, which SMEs often don’t have because they have to rent land for their businesses. In addition, the local financial market is still underdeveloped, with 99 per cent of SMEs depending on bank loans.

Another fence preventing SMEs from accessing bank loans is the legal finance system, which remains inadequate and has few regulations on protecting lenders. Bankruptcy law, which is considered an important legal tool to ensure bankers, is still incomplete.

Collateral is a necessary requirement, however, according to SMEs, local commercial banks should pay more attention to the feasibility of projects, creating more favourable conditions for SMEs to borrow loans for investing in technologies. SMEs, of course, will closely manage the borrowings.

The government has issued legal documents on stimulating and boosting lending to SMES. However, accession to bank loans is not simple. Credit guarantee funds are bridges for SMEs to approaching bank loans. However, since becoming operational in 2001, the funds’ results have not been positive. Many economic experts said that the State must create breakthroughs via issuing detail policies in enhancing lending to SMEs.

According to Vice Chairman of Hanoi People’s Committee, Nguyen The Quang, commercial banks need to be more transparent and more equal in lending to economic sectors. They must have no differences in treatment to private or State-owned enterprises in order to help develop SMEs. To SMEs themselves, they must make their financial  situation transparent to be trusted by local commercial banks, he said.

• Quynh Chi