STATE BANK OF VIETNAM

MINISTRY OF EDUCATION
AND TRAINING

BANKING ACADEMY OF VIETNAM


NGUYEN VAN LE

BANK CREDIT TO SMALL AND MEDIUM
ENTERPRISES IN THE VIETNAMESE
UNSTABLE MACROECONOMY

MAJOR: FINANCE - BANKING
CODE: 62.34.02.01

SUMMARY OF ECONOMIC PHD DISSERTATION


- Vietnamese National Library
1

INTRODUCTION

1. Significance of the research
In every country, small and medium enterprises (SMEs) always play an
important part in the socio-economic development of the country, and
Vietnam is not an exception. Recently, SMEs in Vietnam have ascertained
their positions in the national economy as they account for 98% of the total
number of nationwide enterprises, being the vital drive to create new jobs,
mobilize social resourses for development investments, contributing to the
cause of poverty elimination and poverty reduction in local provinces as well
as actively supporting the development of other economic players in the
economy.
As for the development of SMEs, bank credit has an undebatably
important role, especially as the Vietnamese economy is a bank-based
market. Aware of this fact and the potential of SMEs, commercial banks
have increasingly paid more attention to provide credit to this segment of
enterprises. However, because of their peculiarities in terms of size and
busisness activities, SMEs often experience some difficulties in gaining
access to credit from commercial banks. In addition, the instabilities of the
global economy and the inherent weaknesses of the domestic economy have
badly impacted on the business environment of SMEs in Vietnam since
2008. The rising inflation and interest rates accompanied by falling aggregate
demand have caused a big number of Vietnamese SMEs to run into
difficulty, shrink their business activities, or even stop doing business and go
bankrupt. Consequently, SMEs are faced with more difficulties in getting
bank credit to recover their affected business activities due to the negative
impacts of the unstable macroeconomy. At the same time, the deeper

3.2. In practice: (i) To analyse the environment for bank credit to SMEs in
the unstable macroeconomy of Vietnam; (ii) To analyse and evaluate
comprehensively the bank credit to SMEs in the unstable macroeconomy of
Vietnam; (iii) To propose some solutions and recommendations to promote
bank credit to SMEs in the unstable macroeconomy of Vietnam.
4. Subjects and scope of the research
The dissertation focuses on bank credit to SMEs in the unstable
macroeconomy of Vietnam from 2008 to 2013, the period in which the banking
activities in general and bank credit to SMEs in particular were suffered from
remarkable impacts of the domestic macroeconomic instabilities.
5. Research methodology
In addition to the methods of dialectical philosophy and historical
materialism which are usually used in doing research in general, a complete
set of methods of statistics, comparision, analysis, generalization, deduction,
induction, and illustration by tables and charts are used to make the
dissertation more scientifically convincing. An econometric model is also
regressed to prove the hypotheses about bank credit to SMEs.
6. Contributions of Dissertation
In terms of theory, the dissertation has systematically approached
3

issues relating to growth of bank credit to SMEs in challenging macroenomic
environment.
In terms of practice, the dissertation has made use of an econometric
model to conduct an insightful analysis of the ability to promote bank credit
to SMEs in the context of unstable macroeconomy of Vietnam, consequently
providing the most suitable solutions to the current situtations in Vietnam.
The results show that SMEs has had to face substantial financial risks
because of their decreasing profits accompanied by increasing interest
expenses in the unstable macroeconomy of Vietnam.

employees
Total capital
Number of
employees
I- Agro-
forestry and
seafood
≤ 10
≤ 20 billion
VND
>10
≤ 200
> 20 billion
VND
≤ 100 billion
VND
> 200
≤ 300
II- Industry
and
construction
≤ 10
≤ 20 billion
VND
>10
≤ 200
> 20 billion
VND
≤ 100 billion
VND

to restructure the economy; and (iv) increasing economic flexibility.
1.1.2. Bank credit to SMEs
1.1.2.1.
The concept of bank credit to SMEs
Bank credit to SMEs can be defined as the agreement between banks
5

and SMEs: banks transfer assets to SMEs through discount loans,
underwriting, financial leasing, and other kinds of credit granting; then, SMEs
use these assets based on the principle of reimbursement.
1.1.2.2.
Types of bank credit to SMEs: (i) Based on the form of credit
granting: loans, discount, rediscount, bank guarantee, factoring, leasing; (ii)
Based on credit duration: short-term credit, medium and long-term credit;
(iii) Based on credit guarantee: secured loans and unsecured loans.
1.1.2.3.
The role of bank credit to SMEs: (i) stimulating the reproduction
progress, (ii) improving the productivity of capital; (iii) setting optimal
capital structure for SMEs; (iv) and increasing the competitivity of SMEs.
1.2. FUNDAMENTAL CONTENT OF GROWTH OF BANK CREDIT
TO SMES IN THE MACROECONOMIC CONDITIONS OF
UNCERTAINTY
1.2.1. Principle of the unstable macroeconomy
The unstable macroeconomy is reflected through negative changes of
the most basic variables, including inflation, growth indicator, rate of
unemployment and public debt. In particular, these negative changes usually
lasts for at least two years with extreme and continuous intensity.
1.2.2. Growth of bank credit to SMEs in the macroeconomic conditions
of uncertainty
1.2.2.1.

* Criteria of credit structure to SMEs, including: credit balance based
on form of credit; credit balance based on types of enterprises; credit balance
based on industries.
* Criteria of credit quality to SMEs: overdue loans to SMEs; Ratio of
overdue loans to SMEs to Total lending to SMEs; NPL to SMEs; Ratio of
NPL to SMEs to Total lending to SMEs.
1.2.3. Factors affect bank credit growth to SMEs
1.2.3.1.
The factors derived from banks: the credit policies of banks,capital
mobilization capacity, human resources, credit information, credit process,
credit risk management capacity.
1.2.3.2.
The factors of economic, legal and social context: Economic factor,
social factor, legal factor.
1.2.3.3.
The factors derived from SMEs: financial ability, managerial
competency, development strategy, knowledge and information about
bank credit.
1.3. INTERNATIONAL EXPERIENCES IN GROWTH OF BANK
CREDIT TO SMES IN THE UNSTABLE MACROECONOMY AND
LESSIONS FOR VIETNAM
In this part, the dissertation presents the experience in stimulating
growth of bank credit to SMEs, especially after the effects of crisis in several
countries including Taiwan, Korea and Ireland which provide lessons for
Vietnam Government and banks.
1.3.1. Experiences of several countries
1.3.2. Lessons for Vietnam
The dissertation draws some lessons for Vietnam, which are these
following:
* For State administrative organs: (i) Vietnam Government can

IN THE UNSTABLE MACROECONOMY OF VIETNAM

2.1. GROWTH ENVIROMENT FOR BANK CREDIT FOR SMES IN
VIETNAM IN UNSTABLE MACROECONOMY
2.1.1. The unstable macroeconomicbackground
In the global economic crisis, Vietnam’s economy faced many
instabilities, such as slow growth in quantity, low growth in quality;
fluctuatedand potentially higher inflation; despite an improvement, trade
balance was in deficitand instability; total of investment sharply dropped
because of unfavorable investment environment and pessimistic outlook of
the economy as far as other developing countries. In spite of the fact that the
government has madeto supportproduction, resolve difficulties, the results is
preliminary. The weakness in financial capacity, the ability producing goods
and competingneed a long time to be able to overcome. This situation implies
that businesses, especially SMEs having a high sensitivity to the economic
cycle will face many difficulties in maintaining their business.
2.1.2. Impact ofthe unstable macroeconomic background on SMEs
activities
For the business environment in Vietnam, the world economic crisis
impacts considerably on SMEs, as well as banking services for these
businesses. The number of businesses, most of which are SMEs, dissolved or
deactivated increased. Whereas, businesses start entering also cautiously in
theunstable macroeconomic situation.The businesses currently exists also
faced difficulties in declining revenues and profits. They produced
moderately, focused on resolving inventory instead of investing to expand
production are common. This situation impacts negatively on credit growth,
especially credit for SMEs.
2.1.3. The situation of SMEs raise capital in the macroeconomic
conditions of uncertainty
The macroeconomic instability from 2008 up to now has greatly

removing difficulties in operating capital for SMEs.
2.1.4.2.1. The ordinary commercial credit policies
2.1.4.2.2. The policy of interest
2.1.4.2.3. The foreign exchange policy
2.1.4.2.4. The specific credit policies apply for SMEs: (1) The policies relate
to underwriting activities (including guarantees of Development Bank to
borrow from the commercial bank and through credit guarantee Fund for
SMEs), (2) the specific credit policies for SMEs (in the field of agriculture,
in disadvantaged areas and in investment, exportssectors).
2.1.4.3.
The other solutions of the SBV to support credit growth for SMEs
In the period between 2011 and now, the most recent is from 2013, the
State Bank of Vietnam has actively implemented solutions operating
monetary policy, credit policy, that not only controlled inflation, but
contributed to unfreeze credit for removing difficulties for production and
business activities of enterprises in general and SMEs in particular.
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2.2. CURRENT SITUATION OF BANK CREDIT GROWTH OF SMES
IN UNSTABLE MACROECONOMIC CONDITIONS
2.2.1. Overall evaluation on services provided for SMEs:
Table 2.1: Assessment on providing capabilities of banking services:
(scale from 1 to 5)
Categories
Average
categories
score
Northern
region
Middle

3.47
3.47
3.52
Investment
service
2.92
2.91
2.82
2.95
3.09
2.90
Guaranteed
service
3.25
3.26
3.13
3.31
3.19
3.16
Foreign
Exchange service
3.11
3.15
2.84
3.20
3.16
3.11
Newly developed
service
2.90

advanced services like underwriting or trust are still at the initial phase. In
such condition, the ability to approach and use advanced banking services of
SMEs is certainly limited.
2.2.2. Facts about the improvement of credit facilities provided for
SMEs:
2.2.2.1.
The size of credit
a. The expansion of credit and increase in outstanding debts
The number of SMEs with outstanding debts is experiencing a decrease
tendency, especially in the first 9 months of 2013, this number has downed
by 80% compared to the previous year. Total outstanding debts belonged to
those firms have witnessed a gradual decrease in contribution to total debts in
the economy over the last 3 years, from 21,68% in 2011 to 19, 29% after the
first 9 months of 2013, suggesting that the credit expansion for service firms
is at a slower rate compared to that of the whole economy.
b. Outstanding debts proportion owed by service firms
SMEs are currently accounting for 20% to 27% total debts in
commercial banks, with a gradual down since 2009. At the end of September
2013, outstanding debts owed by those firms remain at 19.29% of total debts,
expected to rise in both amount and proportion in the future.
2.2.2.2.
Credit structure
a. Credit balance by legal forms
SMEs requiring loans from the banks include joint-stock companies,
state-owned businesses, limited companies, and sole proprietorships.

Figure 2.8: Credit balance by legal forms
Source: Author’s surveys in some of Commercial Banks
12


months of
2013
Over outstanding debts
24.55%
26.34%
23.15%
21.68%
20.82%
19.29%
Bad debts/ Credit debts
2.06%
1.90%
2.21%
3.10%
4.20%
4.58%
Bad debts owed by
SMEs/ Total credit
offered to SMEs
1.13%
1.59%
1.97%
3.9%
5.00%
5.2%
Sources: Annual report of The State Bank of Vietnam
13

2.2.3. Solutions to stimulate credit growth in current economic status
Nowadays, with such unstable macroeconomic conditions, many banks

36.76%
32.35%
10-20 billion
22.06%
20.59%
20-50 billion
19.12%
20.59%
50-100 billion
22.06%
25.00%
Source: Calculated by author
14

2.2.4.2.
Credit growth of SME in sample

Figure 2.1: Short term loan over total
fund of SME

Figure 2.2: Long term loan over
total fund of SME

Figure 2.13: Total loan over total fund
of SME

Figure 2.14: Total liability over
total fund of SME
Source: Calculated by author
On average, SME in sample borrow short term loan less than 15% of

Hypothesis 6: there is different relationship between credit growth and
industry of enterprise
Hypothesis 7: there is different credit growth rate between stable and
unstable economic condition
2.2.4.3.2. Model measuring factors affecting bank loan of SME
To check above hypothese, author employs ordinary least square
method to regress the following model:
LOAN
i
=β
0
+ β
1
×SIZE
i
+ β
2
×TANG
i
+ β
3
×DEPR
i
+ β
4
×ROA
i
+ β5×LIQ
i
+

liquidity of enterprises, measured by current ratio; DUM1, DUM2, DUM3,
DUM4, DUM5, DUM6 is industry dummy variables for information
technology, consumable goods, industrial goods, energy, food and beverage,
construction material; and 𝜀 is error term.
Author divides observations in two parts with assumption that the
economy in 2010 was stable while in 2011, the economy was unstable. By
using this method, author can evaluate the factors affecting ratio of bank loan
over total fund of SME in two different periods.
Hypothesis 1: there is a positive relationship between credit growth
and size of enterprise
Hypothesis 2: there is a positive relationship between credit growth
and proportion of tangible assets of enterprise
Hypothesis 3: there is a negative relationship between credit growth
and non-debt tax shield of enterprise
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Hypothesis 4: there is a positive or negative relationship between
credit growth and profitablity of enterprise
Hypothesis 5: there is a positive relationship between credit growth
and liquidity of enterprise
Hypothesis 6: there is different relationship between credit growth and
industry of enterprise
Hypothesis 7: there is different credit growth rate between stable and
unstable economic condition
Table 2.9: Summary of hypothese and expected sign
of independent variables

Hypothese
Independent
variables

NDTS
-
H
6
Different relationship between credit growth and
industry of enterprise
DUM
+/-
Source: Summarized by author
2.2.4.3.3. Results of model measuring factors affecting bank loan of SME
Model result is shown in table 2.10.
The statiscal significance of independent variables:
The regression result shows that asset size, non-debt tax shiled, and
liquidity have clear impact on bank loan of SME in 2010. In 2011, only asset size
and liquidity are varibles affecting bank loan of SME. Similarly, industry dummy
varibles such as information and techonology, consumable goods, energy and
construction material industries are statistically different. However, in 2011,
there was no such difference, except energy industry.
Table 2.10: Regression results in 2010 and 2011
Year 2010
Year 2011
Variable
Coefficient
t-stat
p-value
Biến
Variable
Coefficient
t-stat
SIZE

-0.0510
-0.1552

LIQ
-0.0257
-3.6825
***
LIQ
-0.0224
-2.3781
**
DUM1
-0.3221
-2.6908
***
DUM1
-0.2038
-1.5066

DUM2
-0.3409
-2.8086
***
DUM2
-0.2055
-1.5467

DUM3
-0.1120
-0.9908

Coefficient sign of variable:
In 2010, coefficient’s signs and statistical significance confirm
hypothese H1, H2, H4, H5, H6 and reject H2. In 2011, H1, H4, H5 are
accpected while H2 and H3 are rejected.
Size of coefficients:
In 2011, SME who expanded firm size did limit loan from bank and
relied on owner’s contribution. The coefficient of size decreases from 0,0251
to 0,0171 while the coefficient of profitability goes down from 0,1931 to
0,051. In unstable economic condition, high cost of bank loan and low
profitability force SME to depend on internal funds. Bank are more cautious
when appraising financial capacity of customers.
Fixed asset coefficient increases from 0,0541 to 0,1096, indicating that
banks pay more attention on value of fixed assets as collateral for the loan.
Non-debt tax shield does not have impact on bank loan in case of
unstable economic condition. Similarly, the difference in bank loan between
different industries does not exist as the high correlation between industries.
Credit from the bank has a negative relationship with enterprise
profitability but at a lower level. However, taking advantage of bank loan
brings more benefits for enterprises than other non-interest bearing liabilities.
Table 2.11: The relationship between debt, bank loan ratio and
enterprise profitability in 2010 and 2011

Total
liabilities
Short-term
liabilities
Long-term
liabilities
Short-term
loan

THE UNSTABLE MACROECONOMY
2.3.1. Achievements
Firstly, credit services for SMEs have brought benefits to commercial
banks.
Secondly, many banks concentrated on developing credit services for
SMEs.
Thirdly, credit structure for SMEs has been positively changed which
leads to the improvement of bank credit growth to SMEs.
Forthly, the banks significantly altered their credit policies towards
SMEs and implemented various preferential loan packages to SMEs.
Fifthly, the banks established their own customer policies for SMEs
lending which partially remove the diffenrence between industries, SMEs
and big enterprises.
Sixthly, besides domestic capital, the banks actively seek for fund from
international financial institutions and NGOs in order to obtain capital loans
with low interest rates to reduce lending cost for SMEs.
Seventhly, accompanied services of credit activities to SMEs have
been more convenient to build trust and close relationship between banks
and SMEs.
Eighthly, Vietnamese commercial banks start to pay attention to boost
modernization, apply science technology advances in exploiting retail
market, enhance assess to individual customers and SMEs.
2.3.2. Disadvantages and causes
2.3.2.1.
Disadvantages
Firstly, NPL ratio of SMEs at commercial banks is always higher than
NPL ratio of other kinds of customers.
Secondly, the process of credit restructuring to SMEs based on
industries is still low.
Thirdly, financial ability of the Vietnamese commercial banks are low,

Chapter 3
SOLUTIONS AND RECOMMENDATIONS
TO PROMOTE BANK CREDIT TO SMEs
IN THE VIETNAMESE UNSTABLE MACROECONOMY

Chapter 3 of the dissertation presents three main issues including
guidelines on bank credit to SMEs in Vietnam in the years to come, solutions
to promote bank credit to SMEs in the Vietnamese unstable macroeconomy,
and some accompanied recommendations.
The guidelines on bank credit to SMEs in Vietnam in the upcoming
years are determined based on the guidelines on the development of
Vietnamese SMEs, on bank credit to SMEs in the context of unstable
macroeconomy, and on bank credit to SMEs from the State Bank of Vietnam
and Vietnamese commercial banks.
Based on these above mentioned guidelines and the drawbacks which
are pointed out in Chapter 2, this chapter provides a set of solutions
comprised of two main groups: (i) Strategic solutions and (ii) Specific
solutions to promote bank credit to SMEs in the unstable macroeconomy
of Vietnam.
The strategic solutions include (i) the development of the process of
providing bank credit to SMEs, (ii) the tools to implement the strategy to
promote bank credit to SMEs, and (iii) the evaluation of capital absorption of
SMEs in the Vietnamese unstable macroeconomy.
The specific solutions inlude (i) the preparation of capital to meed the
borrowing needs of SMEs, (ii) the development of suitable credit policy for
SMEs, (iii) the development of standardized process of providing bank credit to
SMEs, (iv) the quality-approached bank credit to SMEs, (v) the implementation
of good customer policy to attract SMEs; (vi) the establishment of marketing
campaigns to polish the brand images of commercial banks, (vii) the
determination of potential SMEs for commercial Banks, (viii) the establishment

Meanwhile, when most of Vietnamese commercial banks are following
the model of retail banking, the segment of SMEs has been defined as their
target customers in the years to come. In reality, credit to SMEs has been
contributing greatly to the growth of the banking system in the recent years.
However, because of the instabilities of the macroeconomy, the commercial
banks’ credit supply to SMEs has been experiencing several difficulties.
Hence, it is necessary to have researches into the growth of bank credit to
SMEs in the unstable macroeconomy conducted in order to promote the
development of the Vietnamese economy in general and of SMEs and
banking system in particular.
The dissertation “Bank credit to SMEs in the Vietnamese unstable
macroeconomy” focuses systematically on the theoretical as well as practical
issues of bank credit to SMEs in the unstable macroeconomy of Vietnam.
The main contributions of the dissertation are as follows.
Firstly, the dissertation presents the theoretical framework of bank
credit to SMEs, macroeconomic instabilities, bank credit to SMEs in the
22

unstable macroeconomy, and the factors that impact on the bank credit to
SMEs in the unstable macroeconomy. Moreover, it also draw a set of
valuable lessons for Vietnam in promoting bank credit to SMEs in the
unstable macroeconomy from the experiences of Taiwan, South Korea,
and Ireland.
Secondly, the dissertation analyses and evaluates comprehensively the
current situation of bank credit to SMEs in the unstable macroeconomy of
Vietnam. The analysis was conducted by using qualitative method as well as
quantitative method of empirical models to measure the effects of factors to
the ratio of bank credit to total capital of SMEs. Subsequently, the
dissertation draws several objective evaluations of the success, limitations,
and causes of the limitations of the bank credit to SMEs in the Vietnamese

consequences and solutions”, defended at distinction level in Jan, 2014.
4. Nguyen Van Le (2013), Social responsibility of Vietnamese commercial
banks. Report “Overview of banking industry in 2013, Forecast and some
policy recommendations for 2014: Review of the restructurre of credit
institution system”. Banking Academy of Vietnam.