Small businesses should reconfigure relationship with banks to get credit: experts

"At some point, some SMEs have to borrow up to 60 percent of their requirement from loan sharks,"  Nguyen Kim Hung, general director of Verco Company, said at the Capital-Financial Forum held in Hanoi in August.

According to a VCCI survey of 504 businesses’ access to credit done at the end of 2017, 60 percent of small and medium-sized enterprises (SMEs) did not have access to loans from the formal sector.

The survey was done as part of a project called "Supporting Vietnamese Enterprises to Improve Access to Credit, Improving Governance and Financial Transparency".

Many rigid government policies too act as barriers. Banks favor large loans to large companies because of lower risk. While loans against mortgage remain commonplace, SMEs find it difficult to meet this requirement since they do not have collateral or the value of their collateral is too low.

According to the VCCI survey, over 80 percent of SMEs have capital of less than VND2 billion ($87,000).

At the end of each year, ahead of the big shopping season, businesses scramble for funds, but find it difficult to get loans from the banks. The difficulties faced by SMEs in accessing credit have been discussed for many years.

There are many causes. Lack of management competence and financial transparency are two common weaknesses of SMEs, and as a result they are unable to acquire banks’ trust and get funding for risky projects without collateral.

As for credit institutions, besides the difficulty in verifying the cash flows of certain projects, they must also weigh the risks involved, and so still prioritize collateral.

So SMEs and credit institutions are not on the same page.

In business, it is very important to recognize and set a level of tolerable risk. Vietnamese banks’ main source of income remains lending to corporate customers. When smaller businesses have difficulty accessing credit due to collateral-related issues, banks’ recalibration of their risk norms to reflect the businesses’ difficulties will help them lend more successfully.

Only when credit institutions change their risk norms will they be able to resolve the difficulties related to collateral faced by SMEs.

And only when trust is established can unsecured loans increase. Credit institutions should diversify their credit products and enlarge their range of lending practices to match the various funding needs of SMEs.

If a business cannot acquire others’ trust, it is very difficult for them to raise funds, including in the form of loans from banks. Unsecured loans depend on trust in and the reputation of a borrower. Therefore, SMEs and family businesses requiring credit must build trust and credibility with the bank. This means transparency of information and financial activities, enabling banks to clearly identify cash flows.

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