by Bui Minh Hoang
|Several experts feel Circular 47 seems to burden SMEs with too many requirements that make it difficult for them to benefit from the new loan platform.— File Photo
A circular issued by the Ministry of Finance (MoF), set to take effect this Friday, may not succeed in facilitating the provision of credit guarantees to small- and medium-sized enterprises (SMEs).
On 22 April 2014 the MoF issued Circular No 47/2014/TT-BTC (Circular 47) containing new guidelines on some content in Decision No 03/2011/QD-TTg (Decision 03) dated 10 January 2011 issued by the Prime Minister.
The main content and governing scope of the earlier circular are the loan guarantees provided by the Viet Nam Development Bank for loans taken by SMEs from commercial banks.
However, several experts feel Circular 47 seems to burden SMEs with too many requirements that make it difficult for them to benefit from the new loan platform.
Let us take a closer look at the circular's provisions.
1. Conditions for loan guarantees from the VDB
To obtain a loan guarantee from the VDB, SMEs must:
(i) have equity capital that accounts for at least 15 per cent of total investment of the project and such equity should be entirely invested in fixed assets ("Minimum Equity Capital");
(ii) not owe any bad debt (group 3 to 5 under SBV Circular No 02/2013/TT-NHNN) with credit institutions as well as at VDB (Bad-Debt Free Condition); and (iii) have written approval of loans from commercial banks for projects that have to be appraised and determined as profitable and creditworthy by the VDB (Loan Approval).
2. Strict conditions cause obstacles in accessing SME credit guarantee fund
It is easy to see that VDB only grants guarantees for SMEs with good financial strength. The question is that if an SME is healthy enough to obtain a Loan Approval, why does it need a guarantee from the VDB?
In fact, commercial banks only grant Loan Approvals when they are sure about the repayment abilities of the debtors and have enough collateral including material assets and guarantees. Obviously, it is hard for SMEs to obtain such Loan Approvals since most of them are enterprises with poor financial strength and insufficient assets that can be mortgaged.
Tran Buu Long, Deputy Director of the SME Credit Guarantee Fund in HCM City, says the credit guarantee conditions are quite difficult for SMEs to meet, especially the one on Minimum Equity Capital.
Several economists have also pointed out that by establishing the requirement of Loan Approvals from commercial banks, the VDB is, in a way, passing on responsibilities and risks to the commercial banks, while it is the latter that need guarantees from VDB to grant loans.
3. Bad-Debt Free Condition sparks debate
A heated debate has broken out among lawyers and bankers on the Bad-Debt Free Condition. Some say that under the umbrella of the Bad-Debt Free Condition, there is no chance for SMEs to get loan guarantees because many firms seeking them are in unhealthy financial condition, bogged down with unpaid debts and/or non-performing loans at commercial banks. This automatically eliminates most SMEs from consideration of a guarantee by the VDB.
However, there are some experts who accept the Bad-Debt Free Condition in Circular 47. They say it is very difficult for VDB to take over the responsibilities of SMEs when they are falling into insolvency or otherwise incapable of repaying debts. If it does this, bad debts will spiral out of control and resources will have to be mobilised to deal with the situation, instead of providing support for more creditworthy SMEs.
Economist Can Van Luc says that in order to support SMEs that have bad debts with commercial banks, VDB needs to deal with them directly. Luc recommends that that all bad debts are sold to the Viet Nam Asset Management Company. This will remove bad debts from the balance sheets of SMEs and they can be deemed worthy of credit guarantees enabling them to take loans from commercial banks.