Finance for SMEs - On the right track?

 

Mr Nguyen Van Trung, Director of the SME Development Department under the Ministry of Planning and Investment said we should not disregard the economic importance of the SME bloc. SMEs have become an increasingly important component in the economy and a valuable membership of the Vietnamese business community. Previously, Singapore or South Korea usually focused on expanding conglomerates, global firms and chaebols but now they have begun developing SMEs. This is because the SME bloc employs the largest workforce in each economy. Furthermore, several SMEs can grow into large companies in the future. The SME block is a dominant majority in both developing countries and developed ones. For example, 99 per cent of companies in Germany are treated as SMEs, which employ two-thirds of workforce and create half of total added value.

 

The guarantee for financial access of SMEs is very important. Finance is the key to successfully operating enterprises of any size. Without this crucial input factor and favourable product costs, hardly can any enterprise survive. Trung said Vietnamese enterprises will hardly be able to compete with the absence of one or more key input factors, such as inaccessible financial sources. Moreover, financial products must also be diversified as the finance accessing demand is different from one to another. The typical financial products are long-term, medium term loans, credit, investment, leasing and so forth.

 

The Government can introduce policies to help SMEs to access financial sources. The Government can also play a non-policy role in promoting and introducing new financial products and service that good to SMEs as they seek efficient loans, both long-term and short-term ones.

 

The Government also instructs SMEs to be more attractive to financial providers. SMEs must prove they are reliable and risk-free clients before banks or financial companies if they want to access loans. In other words, it needs efforts from both financial providers and recipients during the process of financial access development.

 

Dr. Nguyen Thi Canh and Mr Tran Cung Viet of Economic Department under the Ho Chi Minh City Economics University gave research results on provincial-level preferential credit policies for Vietnamese SMEs from analysing, evaluating and paying field trips to Tien Giang and Binh Duong provinces and Ho Chi Minh City. These results reflected interest-bound borrowing situation and debt sources compared with total debts of surveyed enterprises.

 

Surveyed localities	Total working capital	Including		Loans from DAF/PAF		Loans from commercial loans
		Equity	Debt	Borrowing size	Percentage on debt	Size	Percentage on debt
Enterprises with preferential credits
Tien Giang	217.15	105.86	111.29	38.62	34.71	25.58	22.99
Binh Duong	1,131.73	469.71	662.02	163.70	24.73	100.30	15.15
HCM City	8,190.42	4,879.86	3,310.56	2,501.90	75.57	1,407.94	42.53
Total	9,539.30	5,455.43	4,083.87	2,704.22	66.22	1,533.82	37.56
Enterprises without preferential credits
Tien Giang	178.55	115.05	63.50			82.70	130.24
Binh Duong	1,274.29	806.93	467.36			226.50	48.46
HCM City	1,264.10	957.35	306.75			203.61	66.38
Total	2,716.94	1,879.33	837.61			512.81	61.22

 

According to Dr Nguyen Thi Canh, with 115 enterprises with preferential credits, the cost paid by the Government is higher than the benefit of VND69.76 billion these enterprises received. Here, many people think that preferential credits will stimulate production and thus benefit the economy. However, the survey statistics showed that nearly 60 per cent of surveyed enterprises said they wanted to borrow from development assistance fund/provincial assistance fund (DAF/PAF) and didn’t prefer loans from commercial banks although they could do it because interest rates offered by DAF/PAF were lower. Or in other words, if there were no loans from DAF/PAF, nearly 60 per cent of enterprises will borrow money from commercial banks. This means the capital demand is still rising and the supply is guaranteed for business and production expansion investment, Dr Canh affirmed.