Low interest loans inaccessible to smaller enterprises

(ĐTTCO) - The move to reduce operating interest rates by the State Bank of Vietnam (SBV) has attracted much attention from the business community, with the availability of low interest loans being of major concern. Mr. Phạm Việt Anh, an expert consultant in business growth, spoke with Saigon Investment on this issue.

Illustrative photo.

Illustrative photo.

JOURNALIST: - Sir, what do you think will be the impact on businesses after the State Bank of Vietnam reduced operating interest rates for the third time, especially in the current Covid-19 pandemic?

Mr. PHẠM VIỆT ANH: - As far as the general policy is concerned, the SBV move to reduce operating interest rates for the third time will create a positive effect on businesses, especially those who badly need loans to maintain their production and business activities. However, loans should be looked at from two aspects.

First, low interest rates are just a small part of the story. The most important consideration is whether businesses can meet the requirements for taking such loans from commercial banks (CB). Actually, we can’t complain about commercial banks as they too are business enterprises, and they must also make profit and secure their capital. Low interest loans with high risks would be a disastrous formula.

Therefore, businesses must ensure strong business performance, record transparency and adopt professional administrative techniques. These are prerequisites before borrowing money from banks. Businesses really need capital, but banks can hardly give loans to them if they can’t provide the required guarantees. This is the reason why credit guarantee funds are only possible for businesses with guaranteed assets, and this is still extremely hard for small and medium-sized enterprises (SMEs).

Second, interests on loans makes a certain impact on business plans of companies. Thus, they must see a potential market recovery and the profitability in their business plan before they decide whether or not to take loans. Companies must be cautious about taking loans because even low interest loans could place an intolerable burden on them if businesses in the entire market are generally slow and demand recovery is far from expectation. This is very likely due to several reasons such as those caused due to social distancing in the current Covid-19 pandemic, which is hindering free flow of movement of both workers and goods.

- Sir, Commercial Banks mainly focus on big enterprises and their own regular customers, and hence SMEs are way back in line for bank loans. Do you think there is a more easily accessible way for SMEs to receive loans?

- Almost 95% of companies in Vietnam are privately run, and two-thirds are super small enterprises (SSE), and most of them are unable to raise capital by issuing bonds and other assets. The banking system should include smaller banks to provide services for SMEs. Smaller banks would have a better understanding of the local area and their services and products would be more flexible and accessible, because big banks tend to serve only bigger businesses.

Companies now need financial assistance to be able to tackle the continuing effects of the ongoing Covid-19 pandemic and keep their workers employed. When it will be time for recovery, they will need the capital to promote growth again, and help in accelerating the GDP growth. Therefore, the government policies should consider issues of cash supply, inflation and need of capital for smaller enterprises in the post-pandemic period. Credit capital is always limited, because bigger enterprises and state-owned companies are accessing most of the capital sources in the economy.

It should also be noted that it is time for financially strong companies to upgrade their technology when interest rates are low. However, upgrading technology during recovery and economic growth period will depend heavily on Free Trade Agreement (FTA) opportunities, which also could be investment traps for businesses. When long-term monetary policies are uncertain, businesses that take loans to upgrade technologies are very likely to collapse because of a staggering burden. Don’t forget that the financial recession in 2008, that caused huge losses to companies was because of previous excessive investments.

- Sir, there is concern that low interest loans make people take new loans to pay old loan interests. What are your thoughts in this matter?

- This is not a precedent. Some people may do like this or something similar. They do not take new loans with low interest rates to finance their business and production activities. Instead, they may divide the new loan into other investments. To prevent this, management agencies, especially banks, must take effective measures. South Korea and Japan in the 1980s showed that they did not allow private companies to use their capital to maximize their profit elsewhere.  

Instead, competent agencies and banks proactively focused their credit on profitable investments with the greatest potential for boosting economic growth. Credits were given to the manufacturing industry rather than the real estate sector, and credit intended for manufacturing was not offered to importers. Such support was meant for the development of the heavy industry in South Korea in the earlier period, and for the development of a manufacturing industry in Japan such as electronics and automobiles.

- Sir, the State Bank of Vietnam says it lowered operating interest rates to enhance economic recovery, but is this measure enough? What do you think companies actually need now to make a strong recovery?

- In order to provide adequate assistance for the recovery of businesses and the economy, we need appropriate monetary and fiscal policies. Reducing interest rates is part of the monetary policy while the fiscal policy may aim at tax reduction and relief packages which the government needs to provide promptly.

The biggest concern for most companies now is that there is a demand for their products. We have been quite successful in controlling the coronavirus pandemic, but across the world, especially in the major export markets for Vietnamese products like Japan, Europe and the United States, there is still chaos in containing the disease. This has had a rather bad effect on several sectors in Vietnam. Only when the disease is fully curbed will the world market look brighter and Vietnamese companies will once again begin to grow. If companies can stand firm during this period, they will enjoy a very speedy recovery immediately after the pandemic is fully erased.

- Thank you very much.

Thanh Dung (interviewer)

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