SOME THOUGHTS ABOUT PROMINENT SUCCESS OF BANK FOR SOCIAL POLICIES MODEL IN VIETNAM

 PhD. Nguyen Thi Thai Hung

Banking Academy

It can be affirmed that most countries in the world have a policy bank model. It is a financial institution established by the National Assembly or Government, working for the national goal, for the sake of government. Developed industrial countries, such as the US, Germany, France, Japan and even Korea, ... the policy bank model is to promote exports, create jobs in the country, reduce unemployment rate, through credit policy for buyers, or granting credit to importers, or guaranteeing importers in buying high value machinery and equipment of their country. But for developing countries, such as Bangladesh, India, Thailand, ... policy bank model often focuses on supporting the poor and social policy beneficiaries. The Vietnam Bank for Social Policies (VBSP) is also a model of developing countries, but the bank has following unique characteristics and outstanding features:

Firstly, the Vietnam Bank for Social Policies is a unique model of Vietnam as compared to others in some countries in Asia

 Researching some models of policy banks which directly serve households and poor households in Asia clearly shows specificity and superiority of Vietnam Bank for Social Policies.

         India:

         Banks operating in agriculture sector, rural areas and serving poor households in India, the second most populous country in the world are the National Agricultural Development Bank (NABARD), Rural Bank, Cooperative Bank and 3 Local Area Banks. All policy credit activities in India are carried out through Regional Rural Bank and Cooperative Bank, there is no bank dedicated to lending to the poor. The Regional Rural Bank was established to implement the Government's economic programs. Charter capital of this Bank is formed according to the following structure: Central Government contributes 50% of capital; The State government contributed 15% and the Central Bank contributed 35%. The purpose of operation is to serve agricultural and rural development and develop handicraft and fine-art industries. This is the financial institution providing credit to poor rural Indian households. The Regional Rural Bank currently has more than 14,000 branches.

Japan

The National Life Finance Corporation (NLFC) was established in 1949, to provide funds for people who need to borrow capital but cannot borrow from conventional financial institutions, to improve sanitation and living conditions, contributing to improving people lives and strengthening economy development. Capital of NLFC is divided into 02 categories: capital for consumption and for business.

- Capital for consumption: to provide educational loans. This is a financial lending regime set up by the Government to create opportunities for all families to have conditions for their children to study and reduce economic burden on them, thus, develop the education system. Lending to students is done through family to control the use of loans of students and improve the ability to recover capital for the Company.

- For business:  for such target customer groups:

+ Regular lending: is a loan scheme for small and medium enterprises of most industries.

+ Special lending: is a loan scheme to support small and medium enterprises to adapt to the changing socio-economic environment.

+ Business improvement loan: loan without loan security, applicable to small-scale entrepreneurs operating under the provisions of the Chamber of Commerce and Industry for the purpose of improving business.

+ Lending for hygiene living: is a loan regime for business people in the areas related to sanitation such as: restaurants, barbershop, motels etc, to modernize business operations and improve hygiene standards.

          Grameen Bank of Bangladesh

Grameen Bank is owned by customers. Operation objective is to provide credit to poor areas, mostly women, to reduce poverty. Therefore, customers are entitled to borrow capital for production and business, increase income and build houses. All loans are not collateralized and guaranteed. Debt collection is mainly by week. Grameen Bank's operating principle is to apply a positive real interest rate policy; self-offset costs; lending directly to poor households through groups; and do not require borrowers to mortgage assets.

          Grameen Bank's customers are members of the system and poor households  who do not have collateral and cannot access loans from other commercial banks. The loan is tied to a special condition that require borrowers to deposit compulsory savings weekly to accumulate their own capital and contribute to Grameen Bank construction capital.    

Indonesia

Bank Rakyat Indonesia (BRI for short) is a government - owned commercial bank that operates mainly in rural areas. BRI also provides banking services for industrial areas and international complexes. BRI is one of the largest banks in Indonesia in terms of number of employees and networks operating in the countryside. The network of BRI is based on business conditions and needs, not on administrative boundaries.

          Thailand

The Bank for Agriculture and Agricultural Cooperatives  (BAAC for short) operates with the main goal of subsidizing farmers through credit capital investment. Therefore BAAC has the following preferential capital sources: Central Bank provides interest-free or low-interest loans which are paid by the State Budget. The Central Bank guarantees BAAC for borrowing from foreign sources. In operation, BAAC is exempt from compulsory deposits. Commercial banks must deposit at least 20% of capital into BAAC.

From experiences of the countries in the region and the world, from Vietnam practice in solving social policy issues, such as poverty reduction, job creation and environmental protection, training human resources, solving other social policy issues, etc. through financial support for social policy beneficiaries in the past years, the Prime Minister signed Decision No. 131/2002 / QD-TTg dated October 4, 2002 on the establishment of Vietnam Bank for Social Policies, in order to unify financial resources, establish an appropriate funding mechanism, contribute to the best implementation of State's support for social policy beneficiaries.

Compared with the above-mentioned models of policy banks, the operation of Vietnam Bank for Social Policies is unique, unlike any model, but ensuring the requirements set for the implementation of sustainable socio-economic development strategy.

Secondly, state financial activities carried out by VBSP Vietnam are associated with responsibilities of some ministries, departments and local authorities.

There is no policy bank model in the world, as well as no commercial bank in Vietnam that operational responsibility is attachted to political system as Vietnam Bank for Social Policies. In addition to 4 mass organizations, members of the Board of Directors of VBSP at central level are Vice ministers of some ministries. In localities, VBSP has Representatives of BOD with specific assignments and specific responsibilities. This shows that state credit implemented by VBSP is not only the bank’s task, it is also the responsibility of the Party Committee and authorities from the central to local levels in reaching the goal of sustainable socio-economic development.

Thirdly, this is the bank with widest and most stable network to communes and wards with transparent credit procedures and policies and convenient transaction.

It can be affirmed that, in Vietnam, there is no commercial bank that has a large network, covering administrative areas like VBSP. Vietnam Bank for Agriculture and Rural Development (VBARD) only has a network of 2,300 branches and transaction offices of all kinds, open to towns and inter-commune. Meanwhile, across the country there is a widespread presence of VBSP. VBSP has nearly 11,000 transaction points in communes and wards nationwide which is convenient for transactions with social policy beneficiaries including poor households, near poor households, ethnic minority households and households in remote areas.

At the offices of Commune People's Committees of communes and wards all over the country, there are signs of transaction points of VBSP, along with the instruction sign to VBSP transaction points right at the beginning of roads and highways. At the office of the People's Committee, there are a series of public announcements of VBSP on loan procedures, lending policies, loan regulations, loan interest rates, transaction time etc, under supervision of local departments and agencies. This transaction point is convenient for a large number of people, with synchronous settlement of administrative procedures at one place. Infrastrucre and technical facilities for transactions are also spacious. The public announcement of fixed transaction day in the month also facilitates transactions, helping people to actively arrange time to work with VBSP, especially people in mountainous, remote areas, and ethnic minorities. Therefore, it can be affirmed that this is the first advantage, cost savings for both VBSP and the people, ensuring the safety of transactions and travel to both parties.    

Fourthly, the cost of lending activities of VBSP is the lowest, saving costs for the state budget and for borrowers.

For commercial banks, the provision for risk is included in the cost of credit operations, the cost of risk lies in the structure of lending interest rates. According to the State Bank, up to now, the total bad debt that Vietnam Assets Management Company of Vietnam credit nstitutions (VAMC) has purchased but has not managed to processe is over VND 195,000 billion dong, currently accounting for 3.29% of total loan outstanding. Internal bad debt and bad debt sold to VAMC which have not been processed is over VND 345,000 billion, accounting for 5.8% of total outstanding loans. As of December 31, 2016, the total bad debt of the banking sector was calculated at 10.08% compared to total outstanding loans. The bad debt ratio of commercial banks above 10% will increase costs and reduce profits. In terms of interest rates, there are many different sources of information and over different periods, but the difference between lending rates and average deposit interest rates of commercial banks is about 2.5 - 3.5% / year.

For VBSP, there is no official information, but with districts, towns transaction offices’ staff number of 7 - 9, no large expenditures for offices and facilities, monthly transaction points are rent-free from Commune People's Committee, low bad debt ratio etc, it can be said that this is the lowest cost bank.

Due to the characteristics of VBSP operation, the bank implement credit of the State and funded by the State budget. Thus, at low cost, the bank saves expenditures for state budget. There have not been any information available on loss, negativity, waste, corruption in the bank, but this is undoubtedly the most reliable channel compared to other spending activities of the state budget.

Fifth, socialization of state credit activities

The capital of the VBSP despite from any sources has the nature of the State buget and originating from the state budget. Credit activities are implemented by VBSP for policy beneficiaries, disadvantaged areas, for near poor households, just escaped from poverty households and those under programs and projects of the Government. Credit activities of VBSP has participation, coordination and clear and specific responsibilities of the Farmers 'Association, Women's Union, Veterans' Association and Youth Union in communes and villages. Currently, VBSP lending through  190.736 Savings and Credit group (SCGs) managed by Women's Union, Farmer's Association, Youth Union, Veterans' Association, with 6,734,682 members throughout villages in the whole country, with hundreds of thousands of non-permanent officials working closely with the bank in the "poverty alleviation" task. Outstanding loan at present is about VND 165,000 billion. This participation also ensures members of mass organisations to enjoy policies of the state and ensure that the policies are implemented transparently and effectively.

The socialization of state credit policy contributes to raising level of awareness, knowledge on market economy, improving modern credit operations, level of calculation of capital use and capital turnover etc, for members as well as staff of all four mass organisations. At the same time, VBSP also contributes to innovation activities, enhancing the role of the above organizations in the current international integration trend.    

Sixth is the public finance implemented by VBSP has remarkable socio economic effects.

So far in Vietnam, there are two financial institutions of the state implementing state credit, i.e Vietnam Development Bank and Vietnam Bank for Social Policies. Vietnam Development Bank provides loans and guarantees to businesses, currently the NPL ratio is quite high, appearing some negative reaction in the mass media. It must be admitted that, with many credit violations,  uneffective guarantees and loans, so far the role and reputation of this bank has declined much leading to difficult operation.

Vietnam Bank for Social Policies provides loans mainly to households, SMEs that create jobs for workers and businesses operating in disadvantaged areas. The economic efficiency of credit activities of VBSP is very clear: helping poor households to escape poverty, near poor households to escape from poverty sustainably, households just escaped from poverty and not falling back into poverty, disadvantaged students have money for studying... State financial resources are chanelled through VBSP, branches and transaction offices of the bank organize implementation of preferential credit programs of the Government in the locality and a number of targeted programs of each locality, associated with the socio-economic development plans of each locality anhd renewal of the activities of mass organizations. Therefore, the bank receives consensus, support of each family, the public, authorities, and mass organisations in the locality.

Seventhly, state credit channeled through VBSP is ensured with safety and quality

Lending capital of VBSP is mainly from state budget, whether it is central budget, local budget, or Government bonds, guaranteed by the Government and interest margin is paid by the state budget. The capital continues to be revolved for new loans, the ratio of overdue debts and frozen debts is only about 0.7%, the lowest in the whole banking industry in Vietnam, so the capital is secured.

Above facts partly objectivity reflects that loans come to right beneficiaries, under control and used for the right purpose and VBSP complies with the lending process and operation. Lending capital is kept safe, ensure capital cycle for new loans. These practice does not cause credit risks.

Recommendations   

Firstly, since its establishment, although it has been operating for nearly 15 years, VBSP has not yet developed a long term operational strategy to ensure sustainable development so as to well implement lending to the poor and other policy beneficiaries. Therefore, it is necessary to plan a suitable long-term operation strategy to ensure sustainable development of VBSP. These are really a matter of concern not only for leaders and management agencies but also for scientific researchers and everyone who is interested in this area of ​​social policy.

Secondly, the Government should allocate funds with a larger scale to lend.

Up to now, total outstanding loans of policy credit programs have reached over VND 165,000 billion, accounting for only over 3% of total outstanding loans to the economy, including outstanding loans of the Development Bank and off-balance sheet debt of other credit institutions. This rate is too low. In terms of capital, the Government should proactively allocate additional funds for VBSP to lend, put into annual budget balance, with growth rate at least equal to or higher than credit growth rate of the banking industry for the economy, maybe 20% per year.

Thirdly, it is necessary to expand lending programs and projects of VBSP

As mentioned above, there are up to 8 programs and projects having decrease in outstanding loans and some projects having difficult to expand lending. At the same time, in order to implement the second proposal, VBSP needs to actively study and advise on new programs and projects of a social nature, especially job creation, social security; for example: housing projects for workers, student dormitories, projects to deal with a large number of new jobs, loans for vocational training, expanding the scope and subjects of borrowing loans for labor export, .. .

Fourthly, it is necessary to gather programs and projects into VBSP

Currently, there are a number of non-refundable programs and projects funded by the State budget through Ministry of Labor, War Invalids and Social Affairs, the Ministry of Agriculture and Rural Development and the Vietnam Farmers' Association, Committee of Ethnic Minorities which should be narrowed and transferred to VBSP for preferential credit loans, possible lower interest rates, longer duration, more flexible risk handling mechanism, thus, can be more effective and minimize negativity.

Fifthly, it is necessary to strengthen communication on the activities of VBSP

Many people teach, research and study on state credit but know little about credit activities of VBSP. Many people are mainly aware that this is a bank specializing in lending to poor households, disadvantaged students, few people know that VBSP is implementing 24 different programs and projects. Therefore, VBSP need to have synchronous solutions to strengthen communication to the whole society of preferential credit policy.

References:

- Proceedings of the workshop on Sustainable Development of VBSP, October 2014

- www.vbsp.org.vn

- Some other sources

PhD. Nguyen Thi Thai Hung

Banking Academy