The situation of a lack of business investment capital is considered the first difficulty and concern of small and medium enterprises. It is reported that in the past only a handful of SMEs were luckily successful in borrowing bank loans thanks to their good commercial relationships with banks. However, in a few latest months, banks have opened doors for this kind of businesses.
According to HCM City commercial banks, the total outstanding loan balance of the HCM City banking system by the end of December 2004 is estimated at 131 trillion dong. Of the total outstanding loan balance, up to 50% of loans in HCM City are used for investing in SMEs. The rate of outstanding loans focused on state-owned enterprises has decreased sharply, only accounts for 30% of total outstanding loan balance.
In addition to joint stock commercial banks, branches of state-run commercial banks have started to focus on lending to SMEs.
SMEs account for nearly 96% of total businesses in Vietnam, contributing 25% to GDP and attracting a large workforce. This is the most dynamic developed part of the Vietnamese economy. Loaning to the private economy is growing rapidly in contrary to the disbursement situation of banks for recent years. This economy is always short of investment capital due to strict regulations on mortgages. But, in fact, the very big funding to state-initiated large projects such as offshore fishing projects, cement, sugarcane and such like and capital construction projects and state-owned enterprises do not show any effective and resulted in large amounts of non-performing loans (NPLs) at state commercial banks.
Le Duc Thuy governor of the State Bank of Vietnam also is trying to instruct banks not to focus on lending to such ineffective and unfeasible projects.
So, this change in the credit policy made by the SBV has made the private economy including SMEs to get easy to approach bank loan sources.
SMEs are financially supported by international organisations. Lately, the Eastern Asia Bank (EAB) has signed a five-year credit guarantee contract with the US Agency for International Development (USAID) to lend US$2.5 million to SMEs. Accordingly, SMEs whose total capital is under US$654,000 or workforce do not exceed 300 people will be guaranteed to borrow loans at the EAB.
A credit contract worth US$100 million for developing SMEs support programme has been signed between the Asian Development Bank (ADB) and the Vietnamese government. The project loan is divided into two back-to-back sub-programmes. The first sub-programmes, to be undertaken from November 2004 to May 2006, will be financed by a US$60 million loan from ADB’s concessional Asian Development Fund (ADF). The loan carries a 24-year term with a grace period of eight years, with interest is set at 1% per annum during the grace period and 1.5% per annum thereafter. The project will be co-financed by the Agence Francaise de Development with 25 million euro (about US$29.8 million), and Kreditanstalt fur Wiederauflbau (Germany) with 20 million euro (US$23.8 million).
The first sub-programme of the project is expected to be completed in May 2006. After the first sub-programme ends successfully and depending on the budget source of ADB, the bank will continue to carry out the second sub-programme with the funding of US$40 million.
“If SMEs have good business plans, it is high time and best time for them to seek and obtain international financial institutions’ capital sources disbursed via local banks. Some of these credit projects are prioritised for disbursements,” said an executive of an international credit institution in Vietnam.
Recently, the credit guarantee funds are urgently established with the aim to ensure help SMEs that do no have enough mortgages to borrow bank loans. In HCM City, the chairman of the HCM City People’s Committee has signed a decision to establish a credit guarantee fund recently.
According to the latest survey on the capacity to join the stock market of SMEs by the State Securities Commission, most SMEs want to raise capital via the stock market.
Vu Bang, vice chairman of the SSC said that total SMEs whose capital is 10 billion dong each account for 75% of total businesses nationwide and creating about 25% of GDP per annum. Therefore, opening a stock market for SMEs will create a big opportunity for these businesses to raise capital and contribute more percentages to Vietnam’s GDP.
Under the SSC’s plan, the Hanoi Securities Centre from now to 2010 will be built as a OTC centre for SMEs to join in trading. Goods for this market are anticipated to be securities of businesses with capital of 5-10 billion dong. In addition, other securities also will be likely allowed to be listed on the Hanoi OTC market including government bonds of all kinds, investment fund certificates.
“The building of a stock market for SMEs is expected to extremely deal with shortages in investment capital of this kind of businesses because banks cannot be a main capital mobilisation channel for long-term investment and business productions. So, this capital source must be mainly dependant on the capital market—stock market”, said a high-ranking SBV official.