As the number of COVID-19 related cases and casualties continues to rise worldwide, markets around the world have either stalled or faltered. US companies will have zero earnings growth according to Goldman Sachs, and the global manufacturing sector is suffering its worst contraction in over 10 years.
Governments globally are offering a variety of stimulus packages and tax breaks to help enterprises cope with the challenging economic conditions. Vietnam’s Prime Minister Nguyễn Xuân Phúc announced a VNĐ30 trillion ($1.3 billion) fiscal support package in March 2020 to help small businesses cope with the pandemic. Commercial Vietnamese banks have also pledged a VNĐ285 trillion ($12.39 billion) preferential credit package for affected enterprises.
However, Vietnam’s small and medium enterprises (SME) need more support, especially if the pandemic continues for a year or more. Online providers of SME financing are seeing a major increase in the demand for unsecured SME loans, making this a good opportunity to help businesses regain their footing in volatile times.
Recent developments in Vietnam
SMEs contribute hugely to Vietnam’s economy in three ways. As of 2017, they account for 98% of all enterprises, 40% of GDP and 50% of employment. Yet, they face some of the greatest business risks – from lack of access to funds to a limited talent pool.
Unfortunately, the pandemic has further aggravated matters. Travel by air, land and sea has been restricted. As of late April 2020, the Vietnamese government extended the lockdown period in 12 provinces, prolonging the impact on supply chains and movement of essential goods. SMEs working in the tourism, food and beverages, education, textiles and wood production sectors are the hardest hit, either through low revenues or operational shutdowns.
According to a recent report from Vietnam’s Department of Private Economic Development, 60% of the country’s SMEs will lose at least half their revenue if the pandemic lasted for up to six months. Meanwhile, an additional 29% of SMEs would lose between 20% to 50% of their revenue. This report was published in March, and the pandemic has gone well beyond six months already, with no signs of closure.
Surging demand for loans from online lenders
Despite a huge SME funding gap of $5.2 trillion a year in developing countries, SMEs and startups find banks and traditional financing institutions slow to provide much needed credit. In the case of Vietnam, SMEs receive only 22% of the total bank lending and often have difficulties in securing bank loans due to insufficient collateral, strict corporate customer screening criteria, and lack of financial literacy.
This can partly be attributed to the sheer challenge of changing established systems. Banks can take weeks to months to assess a business loan application, and rely on formal credit records and financial statements when making lending decisions. Often, they require assets such as real estate to be pledged as collateral, which small businesses are unable to do. It takes time to devise new policies and measures that cater to SMEs’ needs and situations, such as addressing the lack of collateral, the requirement of lower loan amounts and quick approvals.
According to a recent report, 60% of Vietnam’s SMEs will lose at least half their revenue if the pandemic lasted for up to six months. An additional 29% of SMEs would lose between 20% to 50% of their revenue. This report was published in March, and the pandemic has gone well beyond six months already, with no signs of closure.
In the meanwhile, alternative financing sources such as online peer-to-peer (P2P) lending platforms are bringing in more and more borrowers (and SMEs) and meeting the surge in demand, even though Vietnamese legislation on this is at the pilot stage currently.
These fintech companies offer a relatively new source of funds for SMEs, where investors crowdfund short- to medium-term loans taken by small businesses. Businesses quickly receive the cash they need, and investors see high-yield returns of up to 20% annually.
As investors increasingly participate in SME lending opportunities, they are reallocating their portfolios to accommodate market volatility.
For example, global stocks have been hit particularly hard over the past couple of months via plummeting numbers and prospects. The CBOE Volatility Index Futures (VIX) (also termed the ‘fear gauge’) is currently in the high 30s after peaking at 70 earlier in March 2020.
In times like these, investors are likely to diversify portfolios and redistribute funds where necessary, instead of panic-selling. Current investment trends reflect portfolio shifts into other traditional investment channels that are less volatile, such as real estate and savings. Some may look to explore alternative investment methods such as online P2P lending to support enterprises with cash flow problems and to highlight the resilience of private equity.
The Vietnamese P2P market is estimated to see substantial growth, and its value will touch $7.8 billion this year.
Our online lending platform in Vietnam, for example, has seen a significant rise in interest for short-term loans from SMEs to meet cash flow challenges due to increasing liquidity crunch. This provides an attractive opportunity for investors to capitalise on higher interest rates for market-plus returns in the downturn, and to diversify their portfolios.
SME lending an attractive opportunity
Online SME lending platforms have been promoted as a worthwhile addition to any serious investor’s portfolio. Such platforms enable investors to diversify their portfolios and quickly access novel lending opportunities with additional risk premiums such as illiquidity, manager skill in less-developed markets and structural changes.
Besides coming with less risks compared to other types of assets, a TIAA report says that direct loans give investors “the potential to improve yield and reduce interest rate risk as alternatives to fixed-rate corporate and high-yield debt”. This and P2P lending can also help investors manage portfolio volatility and redirect them from low-return assets. In a market where returns are never guaranteed, private lending is independent of benchmark indices.
SME lending continues to offer attractive risk-adjusted returns, even more so given its low correlation to equity and bond markets.
Bloomberg notes that “loans in the private credit market [often provide] all-in yields of 7% to 9%, sometimes much more.” Validus Vietnam also reports that SME financing on its platform delivers a 14% average return, with 0% non-performing loans (NPLs) to date. In comparison, typical investment-grade corporate bonds yield approximately 3%.
SME lending continues to offer attractive risk-adjusted returns, even more so given its low correlation to equity and bond markets. Investors who use online lending platforms experience higher interest rates in comparison to traditional financial instruments. Online lending platforms also provide direct support to established SMEs and ensure they are on firm footing to register post-pandemic growth.
Online SME lending will continue to see demand, especially in the current economic climate. Google and Temasek’s e-Conomy SEA 2019 Report, for example, predicts that Southeast Asia’s loan book will reach $110 billion by 2025. With banks reluctant or unable to meet the financing needs of SMEs, fintech lenders will help fill this gap, boosting regional and international development and supporting the economy in new ways. As one of the fastest-growing economies in Southeast Asia, addressing the SME financing gap is particularly crucial for Vietnam where SMEs play a major role in the economy.
With over 20 years in global banking in emerging and matured markets like India and Vietnam, Swaroop’s experience covers a spectrum of functions which include consumer lending, sales, credit underwriting, risk management and credit operations. As one of Validus’ earliest employees, Swaroop has worn various hats and headed multiple teams across the business, and has played a key role in taking Validus from a fintech startup to Singapore’s largest SME financing platform in just a few years. He will continue to play an instrumental role in helping to pivot Validus in Vietnam, and drive financial inclusion for the many unbanked or underbanked SMEs. Prior to Validus, Swaroop headed CitiFinancial Consumer Finance as Collections Head for Personal Loans and Prudential as Director of Audit, Groupwide Internal Audit.