Financial System and Formal Credit Services in Vietnam

pecuniary System and Formal reference work Services in VietnamAn overview of the Vietnamese financial systemOver a 4- year period from 1988 to 1992, the Vietnamese disposal develop initiated a wide carrys of economic tames in put in to enhance the modulation itself from a centrally-planned to a market place-oriented economy. Along with the implementation of state enterprise elucidates and extraneous trade liberalization, the Vietnamese government have promoted a huge second of beveling celestial sphere reforms, which has resulted into a diversification of the financial system. First, a Soviet-style mono avowing system has switched to a two-tier banking system in 1988s with the four heavens-specialised state-owned banks sepa evaluated from the put forward depose of Vietnam (SBV) and playing a key role in the banking system. These four state-owned banks accept the margin for Foreign Trade of Vietnam (Vietcombank), the Vietnam coin bank for Industry and Trade (Vie tinbank), Vietnam rim for market-gardening and arcadian Development (VBARD) and the Bank for Investment and Development of Vietnam (BIDV). The SBV acts as the central bank, providing both on-site and off-site inspection and oversight the routines of both banks and non-bank financial institutions.The public banking sector is comprised of the five state-owned commercial message banks which altogether dominates the market. Second, the Vietnamese government withal encouraged and created various opportunities for the influx of revolutionary players into the financial sector. These newcomers consisted of foreign banks, non-bank financial institutions much(prenominal) as insurance companies, join-stock commercial banks, join-venture banks, even reference rating funds and cooperatives. In addition, this insurance has led to a dramatic rise in the quantities of peges and representative offices of existing state-owned commercial banks at that period. Bank for Foreign Trade, for ex ample, has innateled 32 municipal and provincial branches (World Bank 2002). The branch network of the banking sector totally covers nearly 10,000 wards and communes throughout the nation.The economic reform process has, additionally, brought about the marked transformation in agriculture ware sector. The presence of private family removedms and non-farm enterprises in pastoral sites has increased pressures on the government for the establishment of ac quotation institutions. Vietnam Bank for market-gardening and Rural Development (VBARD) and Vietnam Bank for Social insurance policy (VBSP) has whereforece become the dominant financial service providers to the low-income population, and used the all-inclusive network of political chew organizations to mobilize, appraise, and monitor clients (BWTP 2008). want many early(a) developing countries, Vietnamese quotation markets is the co conception of formal and sluttish recognize markets. In general, cracker-barrel financi al system in Vietnam fucking be assemblyed into three main categories formal sector, semi-formal sector and informal sector (Marsh et al. 2004 Lan and An 2005). The formal sector includes Vietnam Bank for Agriculture and Rural Development (VBARD), Vietnam Bank for Social Policy (VBSP) and People identification Funds (PCFs) (World Bank, 2002). Semi-formal reference point is provided by the National and internationalist programs targeting at a selective range of borrowers and conforming to certain development targets (Pham and Lensink, 2007), and by Microfinance plans of Mass Organizsations as well as by Savings and acknowledgement rating Schemes supported by NGO and donors. The informal sector consists of private moneyl completioners, revolving recognise associations (RCA), relatives, friends and other sepa order. The informal sector has been the traditional provider of credence in farming(prenominal) areas, as the result of an underdeveloped formal credit market (Marsh e t al. 2004).In programs towards pitiable and vulnerable households, the Vietnamese Government included credit provision through microfinance institutions (MFIs) in their anti-poverty programs for the rural areas (Commins et al., 2001). These are programs focusing on female clientele who often join in groups, providing infinitesimal contributes for them to empower in income-generating activities (Armendariz and Morduch, 2005). The expected outcome is that rural female entrepreneurs can contend better with emergencies such as unfavorable natural events or be protected from further impoverishment during economic stress (Rutherford, 2002).The formal sector has been the key credit provider in the Vietnamese rural credit market, in which VBARD and VBSP are both the dominant. VBARD has the largest percentage of outstanding loans in the year 2010, accounting for 63%, followed by VBSP at 30%. The tierce perplex pop offs to PCFs, at 6%. In contrast, microfinance institutions occupies merely 1% of outstanding loans. course Percentage of outstanding loans of main sourcesto household borrowersSource (PCFs 2010 VBARD 2010 VBSP 2010 Mix securities industry 2012)Source Microfinance Resource Centre (2001)Regulations regarding banksWith the aim of improving the provision of credit for individuals, households and firms in need and enhancing the effectiveness as well as the wisdom of credit providing institutions, the Vietnamese government has promulgated a wide range of regulations on banking operations. These laws set legion(predicate) regulations for credit products offered, as well as for activities of credit institutions, ranging from capital norms, restrictions on asset/liability management and limits on credit institutions investment in real estate.In 2010, the government has issued the find no.41/2010/ND-CP on a wide range of credit policies aimed at rural and rural development. First, credit institutions should, under the decree, be encouraged to provide th eir credit service for rural areas with appropriate interestingness pass judgment, in accordance with commercial impart tool. Second, add procedures should be simplified, facilitating rural borrowers to get access to loans. Moreover, attention policies for rural borrowers should also be built up so as to curb expected risks, say, natural disasters, earthquakes or epidemics. Third, the decree will track down as a well-grounded framework for the political system and the entirely society in the enhancement of the change provision for the agricultural and rural development.Interest lay out policyInterest rate policy is among life-and-death policies for the reform of banking sector regulated by The Law on Banks and reliance Institutions. Since 2000, the government has gradually liberalised interest rates. And it is the liberalization of the interest rate that gives financial institutions a little more freedom in determining the rates on impart and saving (WB, 2002). The re placement of the base interest rate mechanism plus margins for the ceiling mechanism regarding the domestic currency-based loaning has then been applied for all formal financial institutions. Both base add rate and margin, under this mechanism, acts as limits for the loaning rate needs of the banks. This new mechanism provides adequate flexibility to credit institutions and should help to enhance firms access to credit (IMF, 2002a). Furthermore, the Vietnamese government has also undertaken the regulation for the difference between lending rates and saving rates. According to this regulation, this spread cannot exceed 0.3% and 0.5% per month for short-run loans and medium-term and long-term loans respectively, which has in turn discouraged rural financial institutions from extending downhearted loans to the rural piteous and low-income households, given the high transaction costs for lessened loans (Dao, 2002).Lending technologyIn Vietnam, thither are two rife lending methods namely individual lending and group lending. As shown in the table infra, group lending has become more popular than individual lending, with the proportions for the year 1995, 1998 and 2001 standing at 98.1%, 92.1% and 87.6% respectively. Meanwhile, the percentages for individual lending method was oftentimes lower between 1995 and 2001. While individual lending technology typically focuses on the role of supervise each individual borrower, the mechanism for group lending technology relies on the enforcement of joint liability of joining peniss. Generally, lending technologies can be distinguished based on different dimensions such as the primary source of study, screening and underwriting policies/procedures, structure of the loan contracts, and monitoring strategies and mechanisms (Berger and Udell 2006, hereafter BU06).Source McCarty (2001)confirmatoryUnder Decree No.41/2010/ND-CP, the mechanism of substantiative for loans has been regulated as follows First, credit insti tutions may take the provision of loans to customers with or without security assets into consideration under watercourse regulations. Second, substantiating-without lending conditions, procedures, and loan amounts mustiness be in compliance with current provisions of law on credit institutions provision of loans to borrowers. For individuals and households engaged in agriculture, forestry, fishery or common salt mathematical product, the amount of loan can total up to 50 cardinal VND, whereas the go for for households operating business or production activities or providing services for agriculture and rural areas is up to 200 million VND. And up to euchre million VND for cooperatives and farm owners. Third, credit institutions consider providing trust-reliant loans for individuals and households on the basis of cover by sociopolitical organizations in rural areas under current regulations. Sociopolitical organizations have business of coordinating and performing all or s ome of the credit operation stages after reaching agreement with the lending credit institutions.In reality, related is regarded as one of mandatory requirements for loans by formal credit institutions. Credit institutions often ask for collateral from borrowers in order to ensure the prospect of loan repayment, as well as edit out the asymmetric information between borrower and formal lender. The asymmetric information occurs since most of the banks stay far away from potential rural borrowers, and they find it difficult to acquire prior credit history information as well as current production/business information about those borrowers. In such a case, collateral requirements are given so as to mitigate these problems. Collateral is usually in the form of immovable assets such as knowledge domain use certificates, buildings, fixed assets, bank accounts, and other valuable assets, in which estate of the realm use certificates and real estate are the most preferred collateral b y banks. In rural areas, thither has been a small yield of households that have met the collateral requirements imposed by formal financial institutions, whereas a markedly bigger number of rural borrowers have faced the miss of of collateral for their loans. This has, in turn, confined rural borrowers from having access to loans from formal credit institutions. In such cases, these rural borrowers have to search for other credit providers that do not require collateral, say, private moneylenders, friends, or neighbours which all belong to the informal sector.Therefore, giving households the possibility to obtain ground-use rights and use them as validation of collateral can give rise to the asymmetric information substitute between borrower and formal credit lender, thus fostering credit proceeding in rural credit markets accordingly.The formal sectorVietnam Bank for Agriculture and Rural Development (VBARD)Established in 1998 along with the the intense reform of the financial system and the reintroduction of commercial banks in Vietnam, the Vietnam Bank for Agriculture and Rural Development (VBARD) has been regarded as a state policy bank and accepted subsidy from the Vietnamese government. VBARD has also been known as a legal entity with the sharp focus on the agriculture sector and rural areas. By the end of 2001, VBARD has become among leading commercial banks in Vietnam, having the most extensive branch network in Vietnamese rural areas. The bank then had an operating network of more than 2,300 branches and transaction offices nationwide at the end of 2010.There are the three following credit methodologies that VBARD has utilized for its lending operations. The first methodology is the the provision of individual loans for rural borrowers and enterprises. The mandatory requirement for this loan type is a proof of collateral, in which a orbit use certificate the so called Red Book for agricultural land or Green Book for forest land is the most w idely used. Second, VBARD has also applied group lending mechanism in order to increase its coverage of rural households, as well as to reduce transaction costs associated with small loan accrual. According to this method, each member of lending group bears equally the joint responsibility of loan repayment before a new round of loans is initiated. The eventual methodology involves the existence of guarantee groups formed by members of mass organizations, say, Vietnamese Womens heart, husbandmans Union or Youths Union in lending process. These mass organizations play an important role in guaranteeing the loan repayment, and loans offered by VBARD are then channed through these groups to the target borrowers who are mainly unable to provide a proof of collateral.VBARD specializes in lending to rural households and small-scale enterprises involved in agriculture or off-farm enterprises, but the bank has recently expanded its urban branch network to capture the market of urban smal l enterprises (BWTP 2008).The outstanding loans granted by VBARD to the economy totalled up to 414,755 billion VND in the year 2010. While the percentage of loans for households accounted for 51%, the figure for non state-owned company was 43%. The proportions of loans supplied to state-owned company and to small cooperative enterprises were considerably lower, at 5% and 1% respectively.Figure. Outstanding loans of VBARD by sectorSource VBARD (2010)The feast chart 1 indicates the credit procedures adopted by VBARD. It is clear that there are thirteen distinct stages in the process of loan provision, commencement ceremony with the collection of loan masking forms by bank formalizeds and ending with the livery of appropriate loans to the borrower.Chart 1 Lending procedures by VBARD in VietnamNotes1. Bank positives receive loan act forms from the applicant2. After receiving loan application forms, bank officials report to the head of the credit plane section3. The head of the c redit department assigns a bank official to examine the loan application forms to see if it is filled in properly4. The assigned bank official appraises the applicant, mainly based on collateral5. The assigned bank official informs the head of the credit department about the applicant6. The head of the credit department assesses the information and reports it to the director of the bank7. Director of the bank decides on the loan and informs the head of the credit department8. The head of credit department informs the assigned bank official about the decision9. The assigned bank officer informs the applicant10, 11, 12. Internal information among the banks change departments13. The treasury department disburses loans to the applicant, if accepted.Source Adapted from Ninh (2003)Vietnam Bank for Social Policy (VBSP)The Vietnam Bank for Social Policies was set up under Premiers stopping point No. 131/2002 QD-TTg dated October 4th, 2002 and the Governments Decree No. 78/ND-CP dated Oct ober 4th, 2002 on the provision of credit for the poor and other policy beneficiaries. VBSP was set up on the basis of the reorganization of the Bank for the low and separated from VBARD with the aim of detaching the lending policy mechanism from the commercial lending mechanism. Since then, VBSP has developed its own network of 610 branches in 63 provinces/cities throughout the unpolished and has extended loans to 46% of the poor in rural and mountainous areas (GSO sketch on the results of VHLSS 2006).VBSPs operations are under the supervision of the State Bank of Vietnam, whose the primary objective is to provide non-collateralized preferential loans of different rates and maturities to poor individuals, households, and organizations eligible for social benefits and policies. VBSP is conducting the method of entrusted lending via the four mass organizations, namely Women Union of Vietnam, Farmer Union of Vietnam, War Veteran Union of Vietnam and Youth Union of Vietnam. These fo ur organizations take charge of some lending steps of VBSP such as establishing savings and credit groups organizing certifying poor households, supervising borrowers in using loans properly etc, whereas VBSP has responsibility for conducting loan disbursement, loan collection and safe treasury management.The credit programs provided by VBSP has become increasingly diversify and appropriate with different borrowers. First, for the purpose of the implementation of the National Target Program on Hunger Eradication and Poverty Elimination initiated in 1988s, VBSP has naturalised credit programs particularly targeting at poor households nutriment in rural areas. The second customer group of VBSP is university/college students whose families are ranked as poor households at the commune level or village level. The objective of this lending is to support financially for those students in order that they have opportunities to fulfill their study. The third credit program of VBSP is for ho useholds living in disadvantaged and remote areas where there is very poor infrastructure or challenging climate conditions. The 4th credit program involves an implementation of the national strategy on bang-up water supply and environmental sanitation in rural areas for living conditions improvement, and the target customers are still poor households in rural places. Fifth, VBSP also builds up credit programs for job creation aimed at poor households and small business enterprises. Apart from credit programs listed above, there are still other various programs supporting for poor households in rural areas.The table below gives a comparison in terms of the percentages of outstanding loans allocated by VBSP for numerous credit programs between 2004 and 2010. It is evident that credit programs for production and business of poor households made up the largest percentage in both years, with 82% in 2004 and 40% in 2010. The second largest in 2010, which occupied 29% of the total outst anding loans, was credit programs for education. In contrast, that for migrant workers to go abroad accounted for only 1%.Table The proportions of outstanding loans by credit programs.Source (VBSP 2004 VBSP 2010)In regard to the loan interest rate, in 2013, the annual lending interest rate of the market was 10.8%, while the figure for VBSP was merely 6.0%. That means VBSP support 4.8% of the lending interest rate for the poor (World Bank 2004). Since the decision No. 579/Q-TTg dated May 6, 2009 on the support of the lending interest rate for VBSPs loans was issued, the annual interest rate on loans for agricultural production and off-farm jobs reduced by 5%, from 7.8% to 3.8%, while that of the market was standing at 10.5% on average. By late 2010, VBSPs total outstanding loans attach to 89,461 billion VND, 14 times higher compared to that in 2001.Peoples Credit Funds (PCFs)Peoples Credit Funds were established in 1993 after the collapse of rural credit cooperatives. According to Hung (1998), PCFs were constructed on the model of the Caisse Populaire system in Quebec, Canada, with the technical support from the Development International Desjardins (DID). PCFs were funded by the Canadian International Development Agency (CIDA) and supervised by the State Bank of Vietnam.