Hungry SMEs need banks to change their ‘risk appetite’

By Pham Van   October 28, 2018 | 07:43 pm PT
Hungry SMEs need banks to change their ‘risk appetite’
An employee counting money at a bank in Hanoi. Photo by VnExpres/Anh Tu
Vietnam’s SMEs are hungry for credit, but banks have to change their ‘risk appetite’ to respond positively, an expert says.

Nguyen Thi Mui, Associate Professor and former director of the Vietinbank Human Resource Training and Development School, is senior consultant for a project being implemented by the Vietnam Chamber of Commerce and Industry (VCCI). 

She spoke to VnExpress International about the project, titled "Supporting Vietnamese enterprises better access credit through enhancing management competence and transparency of financial activities”, and issues involved.

At the end of the year, businesses scramble to raise capital, but find it difficult to get loans from the banks. Why is this always the case?

The difficulties faced by small and medium-sized enterprises (SMEs) in accessing credit have been discussed for many years. There are many causes. For SMEs, management competence and financial transparency are two common weaknesses. These companies are unable to build trust with the banks, request funding for risky projects, and cannot provide assets to secure the loan.

A VCCI survey in May 2018 found that in the Red River Delta alone, 43.1 percent of surveyed enterprises said that it was difficult to get loans because of a lack of collateral assets.

For credit institutions, apart from the difficulty of verifying the cash flow of certain projects, they must also consider the risk involved, so they still prioritize collateral. So SMEs and credit institutions do not yet speak with a common voice.

The difficulty in accessing bank credit has led many SMEs to raise capital via friends, family, and even the black market. Can you comment on the implications of this?

Borrowing from friends and family is the norm for many family businesses. But if interest rates are too high, it is difficult for businesses to repay their debt, reducing growth opportunities, and sometimes pushing businesses to insolvency. 

This situation has been a serious problem in many localities, especially where it is difficult to find branches of official credit institutions, or where microfinance institutions have not developed. 

For the time being, the solution would be to diversify lending channels.

Credit growth of the banking system is expected to be lower than in previous years this year. What will this mean for SMEs?

Credit growth in the first nine months of 2018 was 9.64 percent compared to the end of 2017; and it increased by 16.48 percent over the same period in 2017. Furthermore, this increase has almost achieved the Government’s credit growth target of 17 percent for 2018. (The credit growth was 18.17 percent last year)

So while credit growth is expected to be lower, it is still reasonable, given rising inflation and interest rates.

As far as the SMEs are concerned, in order not to obstruct SMEs’ access to credit, the State Bank of Vietnam (SBV) needs to closely control credit for high risk areas such as real estate, securities, transportation projects, and focus capital on industrial or commercial activities, including SMEs.

What are the basic solutions to resolve this ‘capital drought’ faced by SMEs?

Resolving this issue requires inputs from many sides. From the side of credit institutions, to reduce difficulties for SMEs in securing finance, banks need to change their risk appetite and risk management policy.

In business, it is very important to recognize and set a level of tolerable risk. Currently, the income of Vietnamese banks still comes mainly from lending to corporate customers. When businesses still have difficulty accessing credit due to collateral barriers, the recalibration of risk appetite to reflect their difficulties will help businesses borrow more successfully. 

In addition, it is necessary to change the operation of the Credit Guarantee Fund for SMEs to create better conditions for borrowing. Therefore, it is necessary to review the fact that conditions allowing SMEs to be guaranteed by the fund are laxer than those required to acquire loans from the banks.

Only when credit institutions change their risk appetite will they be able to resolve the ‘collateral difficulty’ faced by businesses.

On the other hand, bank staff must get closer to the customers, understand their difficulties and challenges, as well as the developmental potential of enterprises. Once banks have understood and put their trust in a business’s growth, the business will overcome its difficulties and grow. 

And only when this trust is established can unsecured loans increase. In addition, credit institutions should diversify their credit products and enlarge their range of lending practices to match the different capital needs of SMEs. 

On the other side, businesses need to improve themselves by improving their management competence. A key factor in deciding to lend is trust, and this trust is reflected in the management system of a company. 

If trust is not cultivated within a business, it is very difficult to attract capital, including getting loans from banks.

The SBV should pay attention to the development of microfinance institutions to reduce high interest lending.

The SBV also needs to raise the effectiveness of government intervention in credit institutions, enhance inspection and supervision, so that all types of businesses can acquire credit needed for production and commercial purposes.

What are the key issues regarding unsecured loans for SMEs.

Unsecured loans depend on the trust and reputation of the borrower. Therefore, SMEs and family businesses requiring credit must build trust and credibility with the bank. This means transparency of information and transparency of financial activities, which will help banks clearly identify project cash flow.

Businesses must also have a plan to repay both principal and interest on time, which is another factor in building trust and confidence.

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