Enterprises have many ways to mobilize capital, such as mobilizing equity capital through initial capital contributions, retained earnings, or capital from issuing shares; or mobilizing debt capital from bank loans, trade credit, or issuing bonds. Currently, in Vietnam, enterprises have 3 main capital mobilization channels, including bank credit capital (accounting for the largest proportion), mobilization on the shares market, and bonds market (accounting for a smaller proportion).
Source: FiinRatings
In the capital structure of enterprises, short-term capital is often used to serve the need for working capital, serving for production and business. The majority of short-term capital of enterprises is mobilized from bank credit.
Besides short-term capital, medium - and long-term capital enterprises play a key role in the production and business activities of enterprises such as: investing in expanding factories, purchasing equipment, and innovating technology. However, the situation of enterprises "thirsty" for medium- and long-term capital is still a paradox in the market economy. So what are the causes of this problem?
Challenges for Capital Mobilization in Vietnam
For the capital mobilization channel from bank credit, enterprises face difficulties due to the following reasons:
The main capital channel of enterprises depends largely on the banking system. In developed countries around the world, the banking system mainly provides short-term capital for the economy, while medium and long-term capital will be handled by the capital market. Relying too much on bank credit will affect the demand for loans and limit access to capital.
Banks are "running out" of credit room when the State Bank of Vietnam (SBV) gradually tightens the ratio of short-term capital for medium and long-term lending. Because the majority of the capital of the banking system is created mainly from customer deposits, most of which are short-term, the structure of medium and long-term lending will create a large liquidity risk for the banking system. According to Circular 08/2020 of the SBV, which stipulates the limit, banks must comply with the maximum ratio of short-term capital used for medium and long-term lending on a decreasing schedule (from 60% in 2016 to 30% in 2023).
Source: State Bank of Vietnam (SBV)
Market demand in 2023 is weak, leading to difficulties in business production and operation of enterprises. Many businesses do not dare to borrow capital from banks to expand their business scale. In an unstable economy, the performance of enterprises is weak, leading to poor loan application files submitted to banks, making it difficult to evaluate the application.
The bad debt ratio increased in most banks in 2023, so banks are also more cautious in lending and appraising enterprises.
Businesses face difficulties in the procedures and processes of bank loans: Many banks are weak in financial management, lack collateral, have infeasible business plans, have non-transparent accounting, and financial systems, and do not meet standards. This makes it difficult for banks to evaluate customer information.
For capital mobilization in the medium and long term:Â
The Vietnamese capital market has been developing rapidly in recent years, with the formation and operation of all components, including the stock market, bond market, and derivatives market. This has created new business opportunities to raise capital for medium - and long-term development. However, the development of the capital market is still facing many challenges and limitations, causing concerns for businesses when mobilizing capital.
Corporate bond market development has not yet matched its potential. In the past, when there were no mechanisms or policies to control the market, the market experienced a boom in 2021-2022. However, it has stagnated since 2023. The market turmoil mainly stems from the supervision, post-issuance, and distribution of bonds. The misuse of funds by enterprises has eroded public and bank confidence in buying corporate bonds.Â
Recently, many policies have been supplemented and improved to ensure the transparency of the market. In March 2023, the Government issued Decree 08/2023/ND-CP amending and supplementing stricter regulations to ensure the market is organized more orderly and transparently. Therefore, enterprises must also meet higher standards to raise capital through this channel.
Source: VBMA
Enterprises also face difficulties in finding ways to list on the stock exchange. In 2023, the number of newly listed stocks was low, and several companies had to delist due to weak business performance. The time for a public company to be listed on the market is also long (2-3 years) to meet the requirements for listing on the stock exchange. Therefore, raising capital through this channel is difficult for businesses, especially small and medium-sized businesses. In addition, in the past, the manipulation of the market by a few companies has also caused many investors to lose confidence and it will take time to improve.
Capital Market - An Open Playground
In the context of the domestic economy making it difficult for businesses to call for medium- and long-term capital, raising capital from international capital flows is considered an effective solution for businesses, helping to diversify financial sources. In recent years, many large and small domestic enterprises have sought capital on the international market through foreign direct investment (FDI), international loans, and international bond issuance.
In 2023, foreign direct investment in Vietnam reached the highest level ever (reaching 38.02 billion USD, an increase of 32.1% compared to 2022).
Source: General Statistics Office
However, access to international capital is subject to tighter regulation by the government through the amendment of Circular 08/2023/TT-NHNN, aimed at addressing lingering issues for businesses when engaging in foreign borrowing. This includes no longer requiring a comparison of borrowing costs when structuring foreign debt, relaxing conditions for foreign loans not under import deferred payment, and providing clearer guidelines on the utilization of borrowed funds. For medium and long-term capital borrowing, businesses also need to prepare more documentation to substantiate the purpose of the loans.
Therefore, to access this attractive source of international capital, businesses need to prepare necessary information and documents, such as loan applications, business profiles to demonstrate potential, collateral assets or guarantees, legal framework and related regulations, loan purposes, negotiation relationships, etc. If businesses are not well-versed in document requirements, registration procedures, and legal frameworks, it will be challenging to leverage the potential opportunities of this arena.
With a long-standing network of relationships with major financial institutions and experience in designing loan terms and conditions that match the objectives and risk appetite of investors, Virtus Prosperity can be a bridge for businesses to access international capital. With a proven track record of successfully advising on 14 capital mobilization transactions worth a total of USD 132 million in Vietnam, Virtus Prosperity's team of experts can help businesses overcome financial bottlenecks and design optimal capital-raising solutions for each business. We offer solutions for:
Capital Arrangement Services
Medium & Long-Term Loan Structuring Services
Equity Capital Advisory
Contact us today to learn more about the specialized services offered by the Virtus Prosperity team!