What Determines The Access To Credit By SMEs?

Despite much research on SMEs’access credit, little is known about SMEs credit access between two countries, Vietnam and China, especially in comparative empirical study. Most research on credit access usually focuses on either intrinsic factors such as firm size, collaterals, financial statements, performance, or macroeconomic factors that affect business credit availability such as financial market structure and lending technology. There are a few theoretical frameworks in researching the macroeconomic factors that influence SMEs’credit availability. This study was based on the theoretical framework by Berger and Udell (2006) on SMEs’credit issues. According to this theory, technology is the main conduit through which government policies and national financial structure affect SMEs’credit availability. Although many studies have investigated endogenous factors that affect the ability of borrowing of different business groups, not many empirical studies have examined national financial structure combined with government policies through lending technologies that affect access to bank loan. This study attempted to investigate the lack of empirical studies and applied the conceptual framework of Berger and Udell (2006) to research the cases in Vietnam and China. Another theory which is indispensable when researching SMEs’credit availability is capital structure theory since businesses’tendency is to use retained earnings, short-term or long-term debt or raising equity.The overall aim of this study is to investigate what determines access to credit. Great heterogeneous factors influence business financing. Our research focused on matching the demand and supply side that need three methods of analysis. Firstly, we took full advantage of many previous studies to compare issues related to institutional reforms, financial market structure and lending technologies that exist and potentially develop in the near future in Vietnam and China. The overall picture of financial environment facilitates the logical analysis of the results of econometric model. Secondly, by using World Bank Enterprise Surveys in2005both in Vietnam and China, the first section presents comprehensive statistics on the firms and financial characteristics of other marco indicators which facilitated the study of common factors to acknowledge the problems that SMEs faced. In the second section, the binominal logit model is used to access the influence of firms and financial characteristics, creditworthiness, industry and region dummy 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 statuses and different in capital structure of firms with bank loan, firms without bank loan and firms in general.Comparing issues in Vietnam and China of the previous studies whichrelated to background of SME development, institutional reforms, financial reform and SME lending yields the following conclusions. Institutions and support programs create more incentive for large and medium enterprises than small enterprises. In the process of liberalization, both Vietnam and China have gradually released preferential policies for large and state-owned enterprises. China conducted reforms8years earlier than Vietnam; the achievements of Vietnam are relatively lower than those of China. Vietnam institutional system is having both opportunities and challenges. There are many similarities in the banking system in Vietnam and China. There are, however, many differences in level of application and effectiveness. Both Vietnam and China do not allow the 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 targets distinct beneficiaries and difference in outcomes as well as the level of impact. China’s credit quota program was too big in terms of scope and level which generated major benefits for businesses having credit quota. Conversely, DAF program in Vietnam was too strict in lending requirements and did not bring big benefits for beneficiaries, so this program did not create a considerable difference between groups having favored terms and groups 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 with other 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’s appraisal of Vietnamese banks; however, Chinese banks seem to be oriented to the performance criteria based on lending decisions. Overdraft facility is less likely to be used in 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, Chinese SOEs and collectives have lower loan rate than other ownership groups. Chinese businesses 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 benefit from tax reduction and depreciation until these profits are approximately equal to financial distress and agency cost. Management competence contributes to the possibility of access bank loan, but the influence is getting lax with obtaining trade credit. Factors related to size and age of business, managerial skill, board of director strongly influence on getting bank loan, meanwhile factors related to relationship with supplier strongly effect receiving trade credit.Firms in general and firms with bank loans have lower financial leverage than firms without bank loans, so firms in general and those with bank loans increase their use of short-term debt and long-term debt despite their size. Banking systems basically respond to the needs of short-term capital. A part of findings is contradicted to POT and the other findings are consistent with POT. The findings show that firms with bank loan and firms in general are inclined to use short-term debt.Firms with loan application denied did not rely on tangible assets as collateral to acquire bank loans. Firms whose applications were still pending but had international quality certificate or audited financial statement had much more possibility of getting credit than other firms. These results, however, show that firms which were previously owned by the government or have shares as the single largest shareholder are relatively weak and have low chance of obtaining capital.In the case of Vietnam, Central North showed a more positive assessment in terms of improvements in the financing environment than other regions across Vietnam. Meanwhile the Southwest regions in Chinaincluding Chongqing, Cichuan, Guizhou, Genir and Xizang where favorable conditions to access bank loan were created are economically underdeveloped. The results suggest that the local advantage could be very large in the region with efficient government intervention and legal institution support to promotion programs. Through the non-debt tax shields, we find that Vietnamese tax system is in favour 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 be researched deeply to understand why this place is favorable for credit supply. Further researches of access to credit need to pool lending technologies, financial institution, environmental factors into the econometric model to understand sign and magnitude of effects.