Workers of the Thanh Hoa Company in northern Ninh Binh Province produce lacquer plates for export. Bank credit for small and medium-sized enterprises has come to a standstill. — VNA/VNS Photo Tran Viet

HA NOI — Bank loans for small- and medium-sized enterprises (SMEs) came to a standstill in the first four months of 2014 and experts remain divided over the possibility of credit guarantees improving the situation.

The State Bank of Viet Nam's Credit Department has reported a two per cent decrease in credit for SMEs by the end of February. The situation had not improved by the end of April.

SMEs are among the privileged groups that are allowed to get loans with an annual interest rate 8 per cent. The other four priority sectors are agriculture, export, support industries, and hi-tech firms. Other sectors typically pay 9–10.5 per cent interest per year for short-term loans and 11–12.5 per cent for mid- and long-term loans.

However, about 35 per cent of all enterprises–most of them SMEs– are unable to access bank loans, according to BIDV Chairman Tran Bac Ha. He attributes this to: very strict lending conditions imposed by banks to prevent bad debt; enterprises' fear of high borrowing costs; low business efficiency; and low financial capacity.

SMEs account for 97 per cent of the total enterprises in the country, and 21.4 per cent outstanding loans. Around 70 per cent of SME loans are short term.

Central Bank Governor Nguyen Van Binh has agreed with economists that the difficulties faced by SMEs in accessing loans will have negative impacts on credit institutions in Viet Nam.

Binh suggests that credit guarantee funds that have been set up to assist businesses facing bankruptcy should work to thaw the credit freeze.

However, former central bank governor and current Chairman of the SME Association, Cao Sy Kiem , says credit guarantee funds only accept enterprises without bad dents or those who have assets to pledge as collateral. The requirements are as strict as banks, so the status-quo remains, he says.

Economists say that the original purpose of credit guarantee funds was to facilitate lending to enterprises without collateral. Therefore, the only lending criteria for SMEs should be their ability to present a sound business plan. — VNS