Risky business for SMEs

Politburo Resolution No. 68-NQ/TW underscores the pivotal role of Vietnam’s private sector, with small and medium-sized enterprises (SMEs) as its backbone. Yet amid ongoing economic volatility, SMEs’ financial health remains highly vulnerable, and business risks are rising. An uncertain business environment risks reinforcing longstanding barriers that have persisted for decades and constrained SMEs’ access to capital. 

A 2025 report on SMEs’ credit outlook from FiinGroup showed that these enterprises account for roughly 95 per cent of the total in Vietnam, yet contribute less than 20 per cent of revenue and under 10 per cent of total import-export turnover. One of the core factors is limited access to financing. Only 9.3 per cent of SMEs can obtain bank loans, compared with 56.1 per cent of large enterprises. This significant gap highlights a clear “financing gap,” constraining SMEs’ ability to sustain operations and scale up. 

“Blind spot” in risk assessment

In a market economy, banks operate as highly-leveraged institutions, with most assets funded by deposits from individuals and businesses rather than equity. As such, risk control in lending is not optional, it is mandatory. This dynamic has created a longstanding dilemma: SMEs lack capital and struggle to access credit, while banks tend to restrict lending to them or charge higher interest rates. 

The FiinGroup analysis indicates that around 60 per cent of large enterprises fall into low credit-risk categories, whereas more than 70 per cent of SMEs are classified as medium to high-risk. In other words, the smaller the business, the higher the probability of financial distress, including default risk. This helps explain banks’ more cautious stance toward SME lending. 

Importantly, this is not unique to Vietnam. Globally, the SME financing gap remains substantial. According to the “Boosting SME Finance for Growth” report from the World Bank in 2024, the financing gap for micro, small, and medium-sized enterprises (MSMEs) in developing economies is estimated at about 19 per cent of GDP, or roughly $5.7 trillion. Analysts attribute this gap primarily to two factors: information asymmetry and high transaction costs. 

Information asymmetry arises when borrowers have better knowledge of their business conditions than lenders. In Vietnam, this gap is particularly pronounced among SMEs, where financial statements are often unstandardized, unaudited, and in some cases involve dual accounting systems, as flagged by tax authorities. 

As a result, banks struggle to accurately assess cash flows, stability, and risk levels, leading them to adopt safer approaches: rejecting loans, requiring more collateral, or charging higher interest rates to compensate for perceived risks. Transaction costs are also higher for SME lending, partly due to smaller deal sizes.

A representative from a “Big 4” bank in Vietnam explained that processing a VND1 billion ($38,460) SME loan can require nearly the same resources and time as a VND100 billion ($3.85 million) loan to a large enterprise. The lending process, including document collection, financial assessment, cash flow analysis, collateral checks, credit approval, disbursement, monitoring, and risk handling, remains largely identical regardless of loan size. When these costs are spread across smaller loans, they become disproportionately high, making SMEs less attractive in terms of return per underwriting hour or per credit file. 

“Maturity trap” of preferential credit

Analysts argue that simply expanding credit by injecting more capital is unlikely to resolve the SME financing gap at its root. The World Bank warned that providing concessional financing to SMEs, under conditions more favorable than the market, could weaken the role of private financial institutions and hinder long-term financial market development. 

The core issue is that such policies may distort risk pricing signals. When the cost of capital no longer reflects actual risk levels, both borrowers and lenders may develop misaligned incentives: businesses have less motivation to improve financial transparency, while lenders may rely on government support rather than strengthening risk assessment capabilities. The result is not a corrected market failure, but a prolonged state of inefficiency. 

Experts suggest that policy focus should shift from credit expansion to improving the foundational conditions of the financial market. A key priority is developing credit information infrastructure to reduce information asymmetry, the primary barrier in SME lending. Enhancing data collection, sharing, and standardization would enable financial institutions to “price risk more accurately rather than avoid it.” 

Within this context, digital banking is emerging as a critical tool to leverage and operationalize data systems. By digitizing processes and applying data-driven credit scoring, banks can significantly reduce appraisal costs, thereby expanding access to SME financing. 

Automation, digital documentation, and data-based credit scoring can lower the cost of underwriting and managing small-ticket loans that are otherwise economically inefficient. In theory, this allows banks to shift from a “selective low-risk client” model to broader service coverage at lower cost. 

However, many experts caution that digital transformation alone addresses only the surface of the problem without a robust data foundation. The real bottleneck lies in data quality. If input data fail to accurately reflect business realities - lacking completeness, standardization, or timeliness - digitalization may speed up processes without improving credit decisions. This increases model risk and ultimately forces banks back to conservative lending practices. 

Therefore, the true value of digital banking lies not in process digitization, but in building and leveraging a data ecosystem that is “accurate, sufficient, clean, and live.” Only then can transaction costs be genuinely reduced and SME credit expanded sustainably. 

At the same time, analysts emphasize the need to strengthen the legal framework, particularly regulations on collateral and insolvency mechanisms, to enhance contract enforceability and minimize losses when risks materialize. 

Overall, around 65 per cent of SMEs have been in operation for more than five years. However, among those still unable to access financing, as many as 40 per cent fall into this segment, having operated for over five years and carrying medium to low risk. This is considered a pool of potential clients that banks could target.