A better approach

                                                                 Photo: Viet Tuan

People’s credit funds need to be restructured to provide proper support to rural and agricultural businesses.

The financial market share in Vietnam is divided among commercial banks headquartered in Hanoi and Ho Chi Minh City, with only a few headquartered elsewhere. These banks operate on a nationwide basis, while people’s credit funds (PCFs) have a limited operating range in fixed localities.

Compared to the lending market share at financial institutions, the market share of financial institutions with a scope of activities nationwide is low in Japan, while the market share of financial institutions headquartered in cities or provinces is high. Conversely, financial institutions operating nationwide occupy a large market share in Vietnam while those headquartered in cities and provinces have a very small market share.

In Japan, credit funds and agricultural cooperatives are formed on a cooperative basis. Vietnam is an agricultural country, so PCFs mainly undertake credit granting to serve the steps from cultivation to harvesting. I have also heard that, right now, due to the urbanization process, many customers of PCFs are from the industrial sector. Therefore, the targets of credit provision are also changing, just like Japan. Japan’s Central Credit Fund was established in 1995 and is responsible for managing about 1,100 PCFs nationwide. It was converted into the Cooperative Bank in 2013.

It is recognized by various researchers that the Japanese method is more progressive than the Vietnamese method. However, Japan’s financial system could not avoid being affected by global crises - the collapse of Lehman Brothers in particular.

Although the State Bank of Vietnam (SBV) has had to face economic problems, it limited the effect of global crises on Vietnam’s economy. The business index of financial institutions is not clear but there is no duplicity between customers and banks. The financial system operates fairly in Vietnam. When reviewing the economic bubble at the time, it was said that Japan did not announce its bad loans, but the reality is that it did not know how to tally them. People did not understand bad loans before 1999.

According to Japanese media, Japan’s total bad loans stood at JPY8 trillion ($68.4 billion) but according to US media they stood at about JPY100 trillion ($854.6 billion). If Japan had not had experience, this problem would not have been resolved. When trying to change a financial system, we should identify the successful experience of other countries. The most important thing is improving business attitudes about the law and their own strengths. Businesses that lack ability and a proper vision need to improve. We need to construct basic laws when necessary.

There is no financial policy for all countries in Southeast Asia because it is an imperfect market, but such a policy must ensure security, development, and the provision of capital to enterprises.

Financial institutions are set to see higher profits via consumption loans. The loan interest rate is not based on the degree of risk but is understood as the amount to be repaid. Preferential loans exist in every country, but whether poor people - those who do not have the ability to repay even at low interest rates - will take out loans is a question that needs to be asked.
Moreover, it is forecast that there will be cases where the money is not used for the correct purpose.

When considering the future of merging different economic platforms, we have realized that the growth of small and medium-sized enterprises (SMEs) cannot apply under capitalist mechanisms. Vietnam is different from other countries in ASEAN.

It will be impossible to lend to Vietnamese and Japanese enterprises based on business plans and development potential in the time to come. Financial documents do not show the real status of an enterprise, so Japan identifies information by interviewing customers regularly.

Banks will lend based on collateral, which means they are not only based on available documents but also on additional information.

We have also warned that banks are hesitant about announcing settlements. The reasons why Agribank and PCFs have not announced settlements include a lack of assertive ability, finding better solutions, or hiding certain problems. We should be more concerned about the next generation of users instead of paying attention to the past. This is the Japanese lesson.

When banks have to support bad enterprises, there will be cases where banks will not have sufficient funds. Thus, financial organizations must sacrifice their interests to fulfill the corresponding shortfall. We must not blame individuals.

Based on the actions of financial organizations, we make the following conclusions about Vietnam’s economic development.

Firstly, urban PCFs have been modified to directly serve SMEs. Modifying PCFs in industry-agriculture and trade is unrealistic.

According to our research, the current form can serve all types of business in peri-urban areas.

Secondly, with about 1,100 existing PCFs, I think it is impossible to call PCFs units of provinces. Vietnam can learn from credit funds in Japan. Therefore, funds will raise the number of human resources, gain more information in the area and increase loan ability to some cases where banks are concerned about enterprise loans. Although the scope of activities is limited with this method it can compete with banks.

Thirdly, Japan is an example where agricultural cooperatives have many problems. The largest is loan capital use. Loan are not used so much in agriculture, they are used in other sectors. Therefore, we think that building mechanisms for PCFs to meet all demands is a good way. In agriculture, there is Agribank, so PCFs only add to the activities of Agribank.

Fourthly, cooperative banks aggregate, monitor and assist PCFs, and in particular have to guide funds on how to develop local economies. There should also be assessment methods and bonus models.

There are demands on financial organizations but we should not give bonuses that simply increase their size and benefits. We should base this on increasing the number of small enterprises. Managing two problems - effective business and fair business - is very important. Commercial banks and PCFs must undertake these two tasks.

by Mr. Kiyotsugu Yoshihara / Visiting Fellow & Consultant at Kyoto University