Vietnam Bank for Social Policies - a unique credit mechanism for the poor and rural development in Vietnam

Credit supply is increasingly regarded by development organizations as an important tool to cope with poverty in both urban and rural areas. Training activities and technical transfer (an important component of technical assistance  projects) itself cannot have the effect of creating productivity, incomes and higher employment for the poor if there is no simultaneous improvement in access to credit. With the failures of formal financial institutions in reaching the poor and the limitations of informal credit sources that the poor mostly rely on, special credit mechanisms have been developed and deployed throughout the decades around the world. Whether they are failing or succeeding, finding and maintaining a successful model for this purpose is still a problem that countries, including Vietnam, must constantly pursue, evaluate and improve in different conditions and contexts.

1. Necessity of special credit mechanism for the poor in general and for rural agriculture sector in particular and & popular models

For credit institutions in the formal financial sector, lending to the poor is too risky (with a high default rate) and high costs (high transaction costs ), so they often pose stricter requirements for collateral and this continues to hinder a large proportion of people to access to credit.  In light of this fact, one of the first intevenes that governments had is to establish formal cooperatives to serve the needs of the poor - both in the form of specialized cooperatives or adding credit functions to multi-purpose cooperatives. However, in general, the success of cooperatives in providing services to the poor is still quite limited and still lower than expected. This happens due to many reasons.

Firstly, government formed cooperatives often fail in creating a voluntary movement in local communities and establishing democratic organisations. Secondly, in communities with high socioeconomic differences, leadership positions of cooperatives often lies in the hands of the elite group of local, thus, the poor, again being marginalized in this process. Thirdly, compared to benefits to small farmers, benefits to most vuneralbe group like landless people, micro-farmers as well as special interests of women are not satisfactorily met by credit cooperatives. Fourthly, due to political interference and failure to apply advanced models, high default rates become  a feature in credit activities of cooperative, requiring heavy dependence on government subsidy to compensate for losses of capital due to insolvency. Finally, low level of participation of members, corruption and misuse of public funds have become a common feature in cooperatves which were established unvoluntarily.

Facing failures from efforts of the official sector, most popular reaction of the rural poor in looking for resources inside - to mobilize resources of their own - to create a means to meet their own credit needs and reduce dependence on the outside. These solutions, throughout countries, include forms such as revolving credit and savings groups, informal savings associations and mutual support groups. These groups are  organized in various informal form, so collectively known under the name of "informal financial group". The informal financial group, although being important in many rural communities, still does not reach the scale and scope to have significant impacts on credit for the poor in rural areas. Firstly, there are still many groups of poor communities in rural areas who cannot establish informal financial groups themselves. Secondly, even where informal financial groups become important, resources mobilized from the poor through their own savings are not large enough to meet capital demand for their own development needs, especially to expand the scale of their micro businesses, adopt new technologies or set up new businesses. Informal financial groups usually meet credit needs for essential and unusual family expenditures , and working capital of household businesses.

Failures of formal finance in accessing the poor and limitations of expanding informal finance have made a large part of the poor to be continuously dropped. They have to depend on informal private finance to meet their credit needs. Among informal credit provider, trader and land lord are most common in many country, especially in Asia. Informal credit is estimated to account for 30% and to over 80% of agricultural credit supply in developing countries. The flexibility, quickness, transparency of processes, personal relationships and low transaction costs are main strengths of informal private finance. However, informal credit, especially from credit sources such as traders - lenders - land lord often imposes very high interest rates and unfavorable conditions for borrowers. Therefore, loans from informal sources are generally not sufficient in size to serve development objectives, often for short-term purposes , rarely used for investment purposes; often used for traditional activities rather than innovation and creativity, and largely for necessities rather than development needs.

Although the strength of the informal sector in meeting the credit needs of the poor is a flexible, fast and low cost, but the formal sector has lending capacity with greater resources (compared to the informal sector), and at lower interest rates. Therefore, the important issue is how to provide better financial services with better quality for the poor in rural areas through understanding both informal and informal credit, combining the strengths of these two sectors to ensure a better credit flow for the poor.

In response to this challenge, a wide range of operation mode and institutional form are funded or developed by different development organizations, including four common types as following:

Specialized credit institutions such as rural banks are established as an alternative to commercial banks that fail to reach the poor. They participate in both savings mobilization and lending, and build resources through borrowing from other banks, central bank refinancing sources and funding from government and donors. They are expected to pursue more flexible and free lending policies than commercial banks such as loans without collateral, and to do so, they are expected to maintain closer relationships with potential customers and apply innovative methods to reach the poor and ensure loan recovery. They are also expected to be financially autonomous in their activities, which is to ensure cost recovery and provision from interest and service fees earned from lending activities.

Revolving loan fund (RLFs) are established in banks or similar organizations to lend to specific poor groups with specific terms. Funds that are funded by organizations or under a special project can set lending terms different from normal standards. The transaction cost of the loan will be offset by interest charged and any default will be counted as a cost to the fund's capital. The concept of "revolving" means that the real value of the fund must be maintained and be sustainable. This requires the fund to be able to generate enough surplus to cover management costs, provision for default, and compensate for inflation. In fact, many revolving funds have failed to achieve sustainability. UNIFEM (United Nations Development Fund for Women) credit programs and the Sudanese refugee project has adopted this form.

The credit guarantee fund (CGF), unlike revolving fund, with no direct or indirect cash transfer from donors or projects to the beneficiary, guarantee a bank or any other lending institutions against the risks related to borrowers having insufficient collateral. Guarantees can range from 100% to a certain amount. With 100% external guarantees, lenders will definitely only play a passive role because it does not have to bear any risk. The World Bank of Women (WWB) provides 50% guarantee, thus, risks are divided between WWB affiliate in the locality and the local banks. Credit guarantee fund is an locked account in a bank, it generates a small amount of general expenses for donors / projects provide guarantees. Banks are expected to will improve credit risk tolerance after a few years of experience with CGF's operations and eventually transfer this group of customers to the general customer portfolio. The long-term goal is to promote the target population to access the bank.

Intermediary to improve access to credit: 3 types of above credit programs are mainly supply-side solutions to solve credit problems for the poor in rural areas. In contrast, there are also major demand-side solutions, which are to promote and stimulate demand for credit and to support the poor to receive credit from existing sources through negotiation and through presentation to prove creditability. This mode of intervention can work especially well in cases where special credit programs for the poor cannot reach them due to various reasons. Production credit for rural women (PCRW) in Nepal is an example of this case. In the framework Intensive Banking Program of Nepal, a fund is regulated by law to be saved for priority activities including production credit for rural women. What PCRW do is to mobilize women, linking them to commercial banks for loans, and to other infrastructure supply organisations and technical support. This program is implemented through a specially trained team of local officers - the team working on developing women (WDOs).

2. Vietnam Bank for Social Policies - Vietnam's distinctive credit mechanism for the poor in general and rural areas in particular

Facing same situation and challenges that other countries in the world have, for many decades, Vietnam has also devoted much attention to the creation of specific credit mechanisms to fulfill the objectives poverty reduction, support development of micro enterprises, thus, contribute to sustainable economic development of the country. It can be said that most of the popular credit mechanisms mentioned above have been learned, adapted and applied by Vietnam. Besides efforts to develop credit cooperatives, Bank for agriculture and Rural development and set incentives for policy beneficiaries to apply in some specific funds or to commercial banks. The establishment of Vietnam Bank for Social Policies (VBSP) can be considered as a typical distinct mechanism built on the combination of popular principles models in the world under particular historical context as well as socio-economic characteristics of Vietnam.

Firstly, about institutional model, it can be seen that VBSP is a combination of 02 solutions - an intermediary model to improve credit access and a specific banking model for agriculture and rural areas and then continued to be adapted to the context to become a unique model of Vietnam.

From the early 1990s, taking advantage of existing broad network in rural and remote areas of Bank for Agriculture and Rural Development (VBARD) as compared to other commercial banks in the system, Fund for the Poor and later Bank for the Poor was established in VBARD with compulsory contributions of commercial banks and funding from the state budget to develop new lending methods for poor households - lending without collateral.

However, at the time, besides the Bank for the Poor, funding from the State Budget to support the poor and other policy beneficiaries were also assigned to many State agencies, mass organizations and State-owned commercial banks follow different channels. Facing the situation of policy lending sources scattered in many financial institutions with different management mechanisms causing obstacles to State control,  resources of the State are scattered, overlapping, even hindering each other, VBSP was established on the basis of reorganizing Bank for the Poor and become a independent unit, separating from VBARD.

Secondly, in terms of operating modes, compared to the above models, VBSP has operated with two roles : (i) a special credit mechanism to improve services policy beneficiaries when maintaining and developing specific credit programs for each group of customers with different trading processes and terms compared to ordinary commercial banks and (ii) improving the demand side when utilizing mass organizations and grassroots officials to encourage the right people to access the right credit sources. Details are:

- Traditional banking products and services like receiving deposits and providing loans have been exploited, diversified and specialized for different groups of customers. VBSP's lending activities have been implemented associating with various government policy programs in each period in which lending to poor households accounted for the highest proportion of about 35%, lending to disadvantaged students accounted for 28.15%, lending to production and business households in disadvantaged areas accounted for about 11%, rural safe water and sanitation accounted for about 10%, job creation accounted for about 5%, and housing loans to poor households accounted for more than 3% . In addition, there are about 10 other loan programs being implemented, but loan balance in each program only accounted for a very small percentage of less than 1%.

- Mass organizations (Women's Union, Farmer’s Association, Veterans Association, Youth Union) is taken advantage by VBSP to accomplish the goals that the Government has set out initially, i.e: Focusing large resources, creating a breakthrough in poverty reduction; improve quality and effectiveness of policy credit; separating policy credit from commercial credit; mobilize the entire society to participate in the poverty alleviation and contribute to limiting high-interest loans in rural areas. The mandate for mass organizations has contributed to creating conditions for mass organizations to gather forces, consolidate and improve both quantity and quality of the association's movement, increasing the number of members, contributing to consolidating the grassroots system, helping the poor to participate in mass organizations, thereby successfully coordinating and integrating social policy credit with technical assistance, technology transfer, industrial promotion, agricultural, forestry and fishery extension and activities of mass organizations aiming at fast and durable poverty reduction, ensuring social security .

- Products and services outside traditional areas are developped to take advantage of development trends in banking technology, meeting the demand for diversified banking services and satisfy characteristics of policy beneficiaries such as: (i) coordinating with the Bank for Investment and Development of Vietnam to open 20 new overseas remittance transaction points, increasing the total number of remittances points managed by VBSP to 235 points in 51 provinces and cities nationwide ; (ii) provide guidance on deposit mobilization for members of Savings and Credit Groups to help them practice savings and step by step approach to banking services; (iii) diversify money transfer services through inter-bank electronic payment system to make payment of money orders of provincial and municipal branches quickly, accurately, step by step improve the quality of the bank's services. In particular, the successful implementation of the Corebanking application system of VBSP has created a new step in the application of information technology in VBSP’s operation - centralized data across the country which open up the opportunity to deploy new services such as mobile banking, internet banking. In August 2014, VBSP has cooperated with  Asia Fund to carry out a feasibility study project: "Application of new technologies for mobile banking services for poor households and policy beneficiaries". This is the first step to help VBSP implement Mobile Banking effectively in the future. This solution is expected to be a comprehensive, appropriate solution to provide a solid opportunity for new users, who have never had access to modern banking services and for low-income and vunerable people in the society.

3. Results of policy credit for the poor in rural agriculture of VBSP and some recommendations

With creative mechanisms that have learned adapted to Vietnam, during the past decade, VBSP has made a positive contribution to Vietnam's economy and society by accompanying the poor and other policy beneficiaries.

Firstly, regarding the ability to provide services to the target customers , VBSP has significantly contributed to implementation of the goal of enhancing access to banking products and services for the poor and rural areas, effectively serving poverty reduction and new rural construction, ensuring social security.

VBSP currently serves a large number of customers - nearly 7 million customers, with more than 8 million loan accounts and more than 8 million savings accounts of savings and credit group members. Among these customers, 90% are currently living and doing small businesses or production activities in rural, mountainous and remote areas. VBSP currently has more than 10,000 transaction points in over 11,161 communes in all 63 provinces and cities across the country and carries out transactions with customers on a fixed date of the month at such Commune Transaction Points . Dominants over rural credit are VBARD and VBSP, VBSP serves as a policy instrument of the government for the poor through preferential lending, making the proportion of adults in rural areas in Vietnam who have access to loans in the formal sector become quite high compared to other countries. In the survey data of World Bank ( 2014 ) , the proportion of borrowers accessing financial institutions was 20.7% of rural adults (about half of the adults who borrowed at rural areas, 42.6%). This rate is higher than Malaysia (17%), Indonesia (11.4%), Philippines ( 12.1 %), showing that the number of people having access to formal credit in Vietnam is quite high compared to other developing countries in the area.

After nearly 16 years of operation, to 2018, VBSP has deployed more than 23 preferential credit programs with total loan outstanding of over VND 170 thousand billion, helping over 28.8 million poor, near poor households and policy beneficiaries to borrow from VBSP. Policy credit helps more than 4 million households to cross the poverty line, attracts and  create new jobs for over 3.2 million laborers, of whom over 105,000 laborers go to work overseas for a certain period of time; helps more than 3.4 million disadvantaged to get loans for study; builds 8.8 million clean water supply and sanitation works in rural areas, over 9.6 thousand flood shelters for poor households in central provinces, more than 104,000 houses over flood for households the Mekong River Delta and nearly 484 thousand houses for poor households and policy households with no housing in the country ... Policy credit has contributed positively to the implementation of the National Target Program on sustainable poverty reduction, ensuring social security and new rural construction. The rate of poor households in the 2001-2005 period decreased from 17% to 7%; in the period of 2005-2010, it decreased from 22% to 9.45% and in the period of 2011-2015 decreased from 14.2% (in 2010) to about 5% (in 2015).

Secondly, in terms of financial capacity in VBSP activities, outstanding loans of VBSP as of December 31, 2015 reached VND 142,528 billion, an increase of VND 53,066billion (+59.3 %) compared to 2010 ; The average annual growth rate is over 9 %. Currently, over 6.8 million poor households, near poor households and policy beneficiaries are still outstanding, with an average outstanding debt of nearly 20 million VND / customer. Debt balance growth in the period of 2011 - 2015, mainly focused on a number of credit programs: loans to near poor households increased by 25,367 billion dong (starting from 2013); loans for rural clean water and environmental sanitation programs increased by VND 11,769 billion; loans for production households in difficult areas increased by 4,614 billion ... As for student credit program, the decrease of 443 billion dong compared to 2010, the reason for the decrease is due to the debt collection work according to divergences and due maturity loans of banks where the loans reached good results, some borrowers repay their debts ahead of time.

By late 2018, the total outstanding debt of the bank’s credit policy stood at almost VNĐ187.8 billion (US$8 million) – an increase of more than VNĐ16,000 billion against that of the previous year. Last year was also a successful one for the VBSP in recovering debt with a staggering figure of almost VNĐ45,900 billion. In the same year, the bank granted total credit of more than VNĐ62,000 billion to 6.7 million poor households and families of special social policy.

The total bank’s outstanding debt stood at 0.78 per cent of the total debt, of which overdue debt accounted for only 0.39 per cent – the lowest among Vietnamese credit organisations. In order to achieve the above results, VBSP has focused on directing the work of strengthening and improving credit quality, considering this as a key task, throughout the operation of the whole system.

With these achievements, VBSP has become an important tool in implementation of the national target program on sustainable poverty reduction, social security and rural development. However, with the achievements, VBSP still has many issues to be resolved to further adjust and further improve its specific mechanism model to meet new demands of customers and of Vietnam's economy in the coming years.

Firstly, in terms of credit supply scale , although the proportion of adults in rural areas in Vietnam has access to loans in the formal sector is quite high compared to other countries, but the scale of supply still cannot meet all the needs. According to the survey results of CIEM, IPSARD, DERG (2011) , World Bank (2014) and the State Bank (2016 ) Project on Improving Access to Banking Services for the Economy , Vietnamese rural households must continue to rely on informal credit sources in which family and friends play a particularly important role .

According to World Bank survey data (2014), among 48.5% of rural people holding at least one loan, the rate of holding loans in the formal sector is 20.7%. Thus, in addition to accessing credit from the formal sector, there is still a relatively high proportion of people still have to borrow from the informal sector, not to mention borrowers in the formal sector but still have to borrow more in the informal sector, in which a relatively large funding source in rural areas is loans from friends and relatives (at about 30%).

Secondly, regarding sustainability and ability to reach self-sustainable fiance, according to the 2015 annual report of VBSP, total loan outstanding to the poor in 2015 is nearly 40 trillion , accounting for nearly 30% of total outstanding loans with preferential interest rates from 0% to 7.8% / year - much lower than market rates in the same period. Meanwhile, the total capital as of December 31, 2015 reached over VND 146 trillion, of which deposits from organizations and individuals in the market were nearly VND 8 trillion, accounting for only 5% of the total capital. The remaining capital comes mainly from State budget, loan and government guaranteed bonds.

To evaluate success of special credit mechanism models, as described in section 1, the mechanism needs to ensure capital sustainability, i.e ensuring income is sufficient to offset the cost, to at least not undermine capital. In fact, looking at this aspect of special credit mechanism from 2013 to now, VBSP has increasingly improved its ability to preserve capital and financial autonomy when the rate of subsidy from the State budget in the total income have continuously decreased from 25.2% (2013) to 6.3% (2015). This is an issue that VBSP need to continue to maintain and do better in order to reduce the burden on the state budget as well as become more autonomous, and adapt to the increasingly dynamic economic market environment, becoming a successful credit model for the poor in Vietnam.

The existence of special credit mechanisms for the poor is inevitable. However, more important is how to enhance capacity to meet capital requirements as well as ensuring sustainability of such special credit mechanism for the poor. This requires VBSP to continue to assess, recognize the successes as well as current issues, compare with the principles and lessons learned from international practices and environmental context in Vietnam to have next appropriate steps.

An important conclusion to be drawn from the practical implementation of specific credit mechanisms to disadvantaged people in the world is that credit activities beside ensuring financial sustainability, need to focus on design and application of specific methods to reduce transaction costs and achieve higher recovery rates. In addition, a key factor determining the success of credit programs for the poor is to attach social mobilization with promotional activities - it is the use of social intermediaries to mobilize, organize and orient people not only to use loans but also to access enclosed services, achieve better exchange conditions, and overcome other difficulties. Thus, it is necessary to recognize that credit is not a single intervention tool but a component of an overall strategy to reduce poverty and empower the poor.

Therefore, to continue to be successful and improve the problems mentioned above, VBSP needs to apply some lessons learned about supplying credit to the poor in rural agriculture which introduced by S.Tilakaratna (1996) to direct operating model and building solutions together with matching market context and new requirements of the economy :

- Strengthen the organic linkage between savings and credit with interest rates in accordance with prevailing market interest rates to build and maintain long-term sustainable credit programs .

- For simple credit projects (which are programs that only provide credit without using socialization measures), consider using different creative tools to minimize transaction costs and loss of capital in order to maintain self-control of finance.

However, it should be noted that credit projects only use specific tools for the poor without applying socialization measures that are proven to have access to some poor segments, especially those with entrepreneurship and radical as micro enterprises, but there is still no evidence that success is made in accessing ultra poor, those who are penniless, illiterate, most impoverished, and lack confidence in their own self-development ability.

- Implementing measures of socialization (social mobilization, mobilizing human resources and material resources in society) for credit and accompanying services to reach the poor. This is a process where social intermediaries use specially trained grassroots officials to support the poor to raise awareness about challenges and opportunities, know how to organize themselves and make solutions to improve their own conditions. Within that framework, instead of being a single, independent solution, credit becomes a part of a broad overall development process for the poor.

During the last period, VBSP has been following the path of socialization in close collaboration with mass organizations and local authorities to reach target customers that other solutions and tools of the market as well as the government failed. Projects to provide modern banking services are also carried out by VBSP with the purpose of enhancing the ability to access policy beneficiaries. With these steps, it is expected that VBSP will have appropriate orientations and strategies to develop in the new period.

Master Nguyen Thi Hoa

Vice Director in charge

Banking Strategy Institute

References

1. Development strategy of VBSP in the period of 2011 - 2020 in Decision No. 852 / QD-TTg dated July 10, 2012.
2. Chu Ngoc Thanh (2017), Solutions to develop banking services for new groups of customers who had no access to banking services, young people, low-income people, remote areas , Vietnam Banking Conference 2017, State Bank of Vietnam.
3. CIEM, IPSARD, DERG (2011) , The availability and effectiveness of credit in rural Vietnam: Evidence from the Access to Resourse Household Survey 2006-2008-2010 , in-depth study, DANIDA project.
4. VBSP reports and annual reports.

5 S.Tilakaratna (1996), Credit schemes for the rural poor: Some conclusions and lessons from practice, Discussion Paper, International Labor Organization.

6. World Bank (2014), Global Findex Database 2014.