In Vietnam, the small and medium-sized enterprise (SME) community is a vibrant reality that is set to grow in the coming years. Therefore, banks can gain market share if they can utilise technology to “coddle” this group of potential customers.
Despite being the “backbone” of the economy, still, credit is limited
According to Nasdaq, micro, small, and medium enterprises account for about 90% of all businesses globally, providing about 70% of jobs and contributing up to 70% of global GDP.
Vietnam is no exception to the above trend. For years, the Government has always identified SMEs as the “growth engine” and the “backbone” of the economy. By the end of 2022, Vietnam had about 880,000 SMEs, equivalent to 98% of the total enterprises.
Despite playing an essential role in the economy, SMEs still have to rely on friends and family of their founders for loans, accounting for 48% of businesses in Southeast Asia. This number was estimated in Mambu cloud banking platform’s “Small Business, Big Growth” survey, which surveyed 1,000 SMEs globally about their experiences accessing finance through banks and lenders.
According to the survey, 67% of businesses globally cannot obtain a loan in its entirety or in part; in at least one or more loans, 92% of SMEs are willing to change lenders, and will move to digital lenders with a more straightforward approval process.
Due to the gaps in this segment’s traditional banking business model, access to credit still needs to be improved.
Specifically, the first gap highlights that banks concentrate on offering home loans with collateral. Meanwhile, small-value unsecured loans are what SMEs need right now.
In addition, other gaps can be mentioned as banks continue to promote the traditional commercial credit appraisal and processes, which are more suitable for large enterprises without adjusting for SMEs; most banks do not yet have a seamless digital process between online and offline to receive and serve SME customers; operating costs and credit risk of SMEs are still very high.
Mambu’s “Small businesses, big growth” report shows that when accessing bank capital, a proportion of 25%-30% of SMEs often faces barriers such as businesses not securing enough starting capital and having cash flow problems; the remaining barriers come from cumbersome administrative procedures in the lending process, slow and arduous loan approval, not to mention rigid lending criteria.
A 2021 EY global report surveying 5,600 businesses also showed that many SMEs found bank lending products unattractive, needing more personalised opportunities they need for adequate financing. More than half of SMEs want financing within seven days, and 26% would be willing to pay for faster access to credit.
Economic expert – Dr. Le Dang Doanh stated that besides banks’ limitations, Vietnam’s SMEs have many weaknesses. For example, lack of collateral, low business efficiency, and improper financial statements… are the internal factors that make it difficult for SMEs to access capital from banks.
“Mainly due to the lack of information about SMEs, capital supply organisations do not yet have the information to grant credit. That is why banks often refuse to provide capital to SMEs. Moreover, banks do not want to lend to SMEs because they are afraid of bad debt risks when there is not much information about their activities. Therefore, the difficulty for the expansion of credit in this segment is to come up with solutions and creativity in approaching SMEs,” said Mr. Doanh.
According to Pham Quang Minh, General Manager of cloud banking platform Mambu Vietnam, it is true that whether or not to grant credit is a complex problem, the information given to SMEs is very “foggy” and they are often unable to access corporate health to determine risk. “The ability to access capital through bank credit activities is still difficult because the conditions have not been fully met. Therefore, SMEs need a new form of lending to fill this credit gap,” Minh added.
Solutions for banks and businesses
The “new form of lending,” as Minh mentioned, should be supported by modern technology. According to Nasdaq, harnessing the emerging technology with an SME customer base will provide an opportunity worth $66 trillion. Technology will guide this new future and both banks and businesses will reap its benefits.
Also, according to the study, The digital battle in SME lending by Oliver Wyman, the consulting firm, a fast online application is the most desired feature of the credit process for SMEs in most of the countries surveyed.
Accordingly, emerging technology will overcome both the bank’s limitations and the business’s internal factors, as mentioned above, opening new doors for deeper insights into the banking sector. Banks can use analytics to identify opportunities and tailor services as needed.
Minh added: “Access to data is key in order to approve more loans with less risk, and modern technology is helping more banks to participate in the growing and vibrant market. Currently, the Mambu cloud banking platform is working with other fintech to create data, or in other words, create a digital environment for SMEs to transact. Based on this data, banks can come up with enterprise products to match each business’s size and growth needs. It is worth mentioning that all will be done in a speedy, innovative, cheaper digital environment through application programming interfaces (APIs).”
Banks play a crucial role in the survival and development of SMEs by providing loan products to help businesses overcome difficulties. But on the other hand, SMEs have the “right” to choose to replace their credit providers in the face of the emergence of digital lenders. Making better use of technology and redesigning the lending experience for SMEs will help banks capture the opportunity, and credit market, for this sector.
By Quang Nguyen