Removing capital access hurdles for SMEs

In the first nine months of 2023, 116.3 thousand new firms were registered in Vietnam

In the first nine months of 2023, 116.3 thousand new firms were registered in Vietnam, with a total registered capital of 1,086.8 trillion VND and a total registered workforce of 748.9 thousand. In comparison to the same period last year, this represented a 3.1% rise in the number of firms, a 14.6% decline in registered capital, and a 1.2% decrease in the number of workers.

Despite the State Bank of Vietnam lowering policy rates four times since the beginning of the year to 0.5-2% per year, and despite commercial banks having extra money, they are unable to lend. Technically, the new M2 money supply had only expanded by 2.7% by June 30, 2023, substantially less than in prior years. This suggests that the economy's present money supply is quite low. Furthermore, the money turnover in the first six months of the year was just 0.67 times, which is equal to the low money turnover for the full year of 2022. 

Two paradoxes are emerging in the current recovery context: (1) banks are holding an unprecedented amount of public deposits, while credit is growing slowly despite reduced lending rates; and (2) there is excess money and reduced interest rates, but businesses in general and small and medium-sized enterprises (SMEs) in particular cannot access them.

What are the reasons?

Mr. Nguyen Van Than said the subject of "credit inventory" can be approached from three primary perspectives:

First, the economy has not fully recovered owing to global political issues (such as the Russia-Ukraine crisis), which have affected supply sources, orders, and import raw material costs. Traditional investment channels such as the stock market, real estate, and bonds have remained stagnant throughout the country, resulting in sluggish investment demand. Furthermore, despite the State Bank's lending capabilities, many projects with strong spillover effects, such as public investment projects, commercial real estate, and social housing, have not been realized, resulting in low consumption and credit demand.

The current scenario demonstrates that many firms seek to borrow but lack the ability to repay loans. On the other hand, many firms are approached by banks to borrow money but do not need it. As a result, opening up credit sources should target not just businesses with borrowing requirements but also entities with money placed in banks but unsure where to invest. In other words, the idea is to get people to withdraw their money and circulate it in the market.

Second, it appears that commercial banks' risk appetite is shifting. Clearly, by the end of June 2023, commercial banks had lent about 2.3 million trillion VND to SMEs, a roughly 4% increase over the end of 2022 and accounting for around 18.5% of total economic debt. This is not a small sum, but the loan situation has deteriorated in the last three months. Perhaps commercial banks are projecting market growth differently than enterprises are.

Third, there is no denying that SMEs have a lack of openness, financial disclosure, and business strategies, and growth in this area is gradual. This is one of three important issues (together with the two previously stated) inhibiting commercial banks and SMEs from establishing trust in order to increase unsecured loans. Banks are, in essence, businesses. They will almost certainly not refuse if they are confident in the creditworthiness of the borrowers.

Proposed Solutions

Some issues need to be affirmed by the expert:

Vietnam's economic situation will continue to be difficult due to both domestic factors (such as real estate market congestion, corporate bonds, and slow disbursement of public investment capital) and external factors (such as the Russia-Ukraine conflict leading to uncontrollable inflation and affected supply sources and orders). However, Vietnam also has many opportunities to recover and develop from the trend of investment shifts and other business opportunities arising from Vietnam's rising political position.

The risk appetite for commercial banks is a legal right. Therefore, the difficulties faced by businesses in general and SMEs in particular cannot be entirely attributed to commercial banks. The key to the solution is to open up the market and stimulate domestic consumption, especially domestic consumption.

Based on that, in Mr. Nguyen Van's view, the following solutions are recommended:

From the Goverment:

With limit ed resources, the government should concentrate on addressing "hot" bottlenecks with large spillover effects in order to provide market motives and employment for enterprises and people. Promoting public investment and real estate industries, for example, which have strong spillover potential, as well as disbursing public investment resources and constructing social housing projects, must be prioritized promptly. The government must implement measures that encourage enterprises to "be interested in social housing," such as allowing SMEs to participate in at least 30% of public investment projects to mobilize various social resources.

Furthermore, we must utilize the function of collective organizations, such as cooperative alliances, the General Confederation of Labor, and business groups, to strengthen linkages and encourage domestic products consumption. In addition, fiscal policies such as extending the 2% VAT reduction period, supporting the lowering of import taxes, decreasing different fees and levies, and so on must be implemented to stimulate domestic goods consumption. Rapidly update the SME Support Law, establish which sectors, areas, and procedures may lead to the advancement of 100 million people, and then issue suitable mechanisms and policies to allow the SME community to grow significantly, steadily, and sustainably.

Furthermore, continue to strengthen the procedures for expanding the corporate bond and stock markets; study and expand, and create circumstances for additional capital channels such as venture capital funds, angel investment funds, and fintech operating models. Simultaneously, think about changing the operational processes of non-budget financial programs including credit guarantee funds, SME support funds, and industrial innovation funds. Improve the legal structure governing credit institutions as soon as possible, and be resolute to avoid cross-ownership and hidden interests in banking operations in order to keep the credit market healthy. Direct local governments to improve management and assistance for SMEs, notably by expanding the role of local management agencies in reviewing and certifying the legitimacy of enterprises for loan guarantees.

From the Banking Sector:

Submit a draft amendment to the Credit Institutions Law as soon as possible; vigorously implement Government Resolutions 35 (2016) and 58 (2023) on supporting the development of businesses, private businesses, research and expand loan programs for SMEs; proactively and regularly contact businesses to improve the effectiveness of lending activities in localities; and resolutely handle cases where officials create difficulties for businesses.

Consider lowering lending criteria; at the same time, collaborate with Credit Guarantee Funds to conduct research, modify the coordination mechanism in simplified lending guarantees, eliminate overlapping procedures, and strengthen the function and duty of Credit Guarantee Funds. Continue to investigate the possibility of lowering interest rates in response to a stable macroeconomic environment, in order to stimulate growth, limit   inflation, and stabilize exchange rates.

From the Businesses:

Actively seek new consumers and business possibilities while simultaneously improving management, production, business strategies, and financial transparency as a foundation for commercial banks to evaluate. Actively collaborate with representative groups to give information, recommendations, and feedback to appropriate authorities in order to overcome capital-related challenges and hurdles in a timely manner.

It can be stated that our Party and State have always defined the status, role, and relevance of institutions in the socioeconomic growth of the country over the years. As one of the three achievements, the XIII Party Congress emphasized improving the market economic institution. "High-quality institutions" are among them, as are new needs to develop a sound legislative framework in order to properly harness the country's resources, especially financial resources. High-quality institutions are required for firms to compete healthily, to foster innovation, and to strengthen the business community's and the economy's competitive potential.

In the current setting, the State's procedures and policies have not yet fully proved their coherence, in addition to the objective effects of the market. Meanwhile, corporations have not demonstrated their ability to reinvest resources... As a result, from the standpoint of the state, banks, and enterprises, the current financial crisis cannot be handled by the will of one party alone, but requires all parties to listen to and understand each other's perspectives, as well as collaborate to investigate and solve obstacles and problems.

From a personal standpoint, lowering interest rates is simply one of the answers that must be maintained. The key is for the government to support and elevate businesses in general, and SMEs in particular, to address two issues: (1) SMEs' ability to seek sustainable development opportunities, changing their mindset from day to day; and (2) SMEs' ability to meet borrowing requirements (specifically, their ability to provide transparent financials and business plans...). To do this, the government's leadership in opening up the market and assisting enterprises is critical.

This indicates that if the government concentrates solely on monetary measures, its effect on the market will be limit  ed. As a result, it is vital to investigate the combination of fiscal and monetary policies in order to improve policy efficacy in the future.