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What Determines the Access to Credit by SMEs? a Comparative Study in Vietnam and China

Author: Le Nu Minh Phuong
Tutor: Wang Xiaoqin
School: Huazhong University of Science and Technology
Course: Western Economics
Keywords: SME access credit firm characteristic financial characteristic managerialcompetence financial institution lending technology
CLC: F276.3
Type: PhD thesis
Year: 2013
Downloads: 33
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Abstract

Despite much research on SMEs’ access credit, little is known about SMEs creditaccess between two countries, Vietnam and China, especially in comparative empiricalstudy. Most research on credit access usually focuses on either intrinsic factors such asfirm size, collaterals, financial statements, performance, or macroeconomic factors thataffect business credit availability such as financial market structure and lendingtechnology. There are a few theoretical frameworks in researching the macroeconomicfactors that influence SMEs’ credit availability. This study was based on the theoreticalframework by Berger and Udell (2006) on SMEs’ credit issues. According to this theory,technology is the main conduit through which government policies and national financialstructure affect SMEs’ credit availability. Although many studies have investigatedendogenous factors that affect the ability of borrowing of different business groups, notmany empirical studies have examined national financial structure combined withgovernment policies through lending technologies that affect access to bank loan. Thisstudy attempted to investigate the lack of empirical studies and applied the conceptualframework of Berger and Udell (2006) to research the cases in Vietnam and China.Another theory which is indispensable when researching SMEs’ credit availability iscapital structure theory since businesses’ tendency is to use retained earnings, short-termor long-term debt or raising equity.The overall aim of this study is to investigate what determines access to credit. Greatheterogeneous factors influence business financing. Our research focused on matching thedemand and supply side that need three methods of analysis. Firstly, we took fulladvantage of many previous studies to compare issues related to institutional reforms,financial market structure and lending technologies that exist and potentially develop inthe near future in Vietnam and China. The overall picture of financial environmentfacilitates the logical analysis of the results of econometric model. Secondly, by usingWorld Bank Enterprise Surveys in2005both in Vietnam and China, the first sectionpresents comprehensive statistics on the firms and financial characteristics of other marco indicators which facilitated the study of common factors to acknowledge the problems thatSMEs faced. In the second section, the binominal logit model is used to access theinfluence of firms and financial characteristics, creditworthiness, industry and regiondummy on the probability of which firms accessed credit. Thirdly, we applied the multi-nominal logistic model and OLS model to understand the possibility of four loan statusesand different in capital structure of firms with bank loan, firms without bank loan andfirms in general.Comparing issues in Vietnam and China of the previous studies whichrelated tobackground of SME development, institutional reforms, financial reform and SMElending yields the following conclusions. Institutions and support programs create moreincentive for large and medium enterprises than small enterprises. In the process ofliberalization, both Vietnam and China have gradually released preferential policies forlarge and state-owned enterprises. China conducted reforms8years earlier than Vietnam;the achievements of Vietnam are relatively lower than those of China. Vietnaminstitutional system is having both opportunities and challenges. There are manysimilarities in the banking system in Vietnam and China. There are, however, manydifferences in level of application and effectiveness. Both Vietnam and China do not allowthe existence of special credit, but in fact, the local government puts pressure on state-owned commercial banks, especially in China, to allocate special credit.Both China and Vietnam offered credit support programs, each program targetsdistinct beneficiaries and difference in outcomes as well as the level of impact. China’scredit quota program was too big in terms of scope and level which generated majorbenefits for businesses having credit quota. Conversely, DAF program in Vietnam was toostrict in lending requirements and did not bring big benefits for beneficiaries, so thisprogram did not create a considerable difference between groups having favored terms andgroups not having favored terms.In common, banks apply asset-based lending in accordance with relationship lending;Land Use Rights Certificate (LURC) is often used as collateral for bank loans in Vietnam.Vietnamese business heavily depended on real estate, land as collateral compared withother Asian countries, so small businesses faced high constraint in collaterals. Chinese businesses have fewer restrictions in collateral to access bank loan than Vietnamese one.Creditworthiness variable and financial statement audited are not criteria for loan’sappraisal of Vietnamese banks; however, Chinese banks seem to be oriented to theperformance criteria based on lending decisions. Overdraft facility is less likely to be usedin Vietnamese financial market compared with Indian and Chinese financial markets.Interestingly, Vietnamese enterprises which use overdraft facility increase by size.The bigger Vietnamese SMEs are, the more proportion of bank loan they obtain.Vietnamese banks are more favorable to SOEs than Chinese banks. In particular, ChineseSOEs and collectives have lower loan rate than other ownership groups. Chinesebusinesses seem to be cautious in getting bank loans than Vietnamese businesses do.Vietnamese firms try to obtain as much profit as possible from loans in order to benefitfrom tax reduction and depreciation until these profits are approximately equal to financialdistress and agency cost. Management competence contributes to the possibility of accessbank loan, but the influence is getting lax with obtaining trade credit. Factors related tosize and age of business, managerial skill, board of director strongly influence on gettingbank loan, meanwhile factors related to relationship with supplier strongly effect receivingtrade credit.Firms in general and firms with bank loans have lower financial leverage than firmswithout bank loans, so firms in general and those with bank loans increase their use ofshort-term debt and long-term debt despite their size. Banking systems basically respondto the needs of short-term capital. A part of findings is contradicted to POT and the otherfindings are consistent with POT. The findings show that firms with bank loan and firmsin general are inclined to use short-term debt.Firms with loan application denied did not rely on tangible assets as collateral toacquire bank loans. Firms whose applications were still pending but had internationalquality certificate or audited financial statement had much more possibility of gettingcredit than other firms. These results, however, show that firms which were previouslyowned by the government or have shares as the single largest shareholder are relativelyweak and have low chance of obtaining capital. In the case of Vietnam, Central North showed a more positive assessment in terms ofimprovements in the financing environment than other regions across Vietnam.Meanwhile the Southwest regions in Chinaincluding Chongqing, Cichuan, Guizhou, Genirand Xizang where favorable conditions to access bank loan were created are economicallyunderdeveloped. The results suggest that the local advantage could be very large in theregion with efficient government intervention and legal institution support to promotionprograms. Through the non-debt tax shields, we find that Vietnamese tax system is infavour of firms with bank loans and firms in general than firms without bank loans.It is recommended that Northern Central in Vietnam and Southwest in China should beresearched deeply to understand why this place is favorable for credit supply. Furtherresearches of access to credit need to pool lending technologies, financial institution,environmental factors into the econometric model to understand sign and magnitude ofeffects.

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