RELACIÓN ENTRE EL COMPORTAMIENTO SOCIALMENTE RESPONSABLE Y LA

Despite a number of key policies established over the past two decades in the rural credit market to support poverty reduction, Vietnam is still home to over 12 million people (14.2%

of the population) living in poverty5 (World Bank, 2008). Currently, the majority of poor

households in rural areas live in poor conditions such as temporary houses, lack of fixed assets, low and unstable income. Accessibility to credit has remained one of the critical issues of the country‟s poverty reduction and rural development strategy.

The VBSP microcredit programme has been designed to target the poor who face

disadvantage in living conditions and have limited access to finance sources. Since its official establishment in 2003, the VBSP provides the poor with preferential microcredit through a

„group-based lending scheme‟. To borrow credit from VBSP, a household should join a credit

group in its locality. A credit group consists of 5 to 50 members residing in the same village. If in a village the number of members is lower than 5, they should join a credit group in another village. Each credit group sets up a management board, which is responsible for the borrowing and credit use of its members. According to the VBSP‟s lending policies, to become a member of a credit group a household should meet the following criteria:

- The household has a long-term residence permit at the locality in which the credit

group is located.

- The household has someone who is able to work (working force).

- The household is classified as poor by a commune authority.

- The household has a demand for credit. The credit needs to be used in production or

for consumption necessary for subsistence.

- Total loan size is not more than 30 million VND (VBSP lending policies in 2012). A

household can borrow many times, but the total outstanding loans may not exceed 30 million VND.

5 _{In 2006, the national poverty line was set at 260,000 VND (16 USD) per month per person in urban areas and}

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Standard lending procedures for a member of a credit group applying for VBSP loans are as follows. First, applicants send a formatted letter to their credit group. In the letter, the

applicants specify the amount and purpose of the loan that they intend to take. Upon receiving the applications, the credit group leader arranges a meeting of all members to consider the relevance of the loans. During the meeting, the credit group, based on the consensus of members, determines which households are able to borrow and the amount and terms of each loan. A list of the successful applicants is prepared and sent by the credit group leader to the People‟s Committee in that commune. Once the list is ratified by the People‟s Committee, it is sent to a VBSP branch for final approval. It often takes from one to four weeks to obtain credit (Nguyen, 2008; Quach, 2005).

„Group-based lending‟ has been popular in making loans to rural poor households since the start of the VBSP microcredit programmes. However, it is worth noticing that this lending practice does not strictly follow the joint-liability principle. The borrowers are required to form a group, including a number of certified poor members and a group leader, but no joint- liability is specified. The group leader‟s tasks are: (i) to provide information of group

members to credit officers; (ii) to collect loan applications from group members and disperse the loans, and (iii) to convince members to repay their loans. In the case of a default, the responsibility for dealing with default borrowers is the credit officer; the group leader helps persuade the defaulters to repay. It is simply, according to Quach (2005), a „lending through a group‟ mechanism that adopts a „group-based lending‟ to reduce transaction costs rather than to reduce default risk. However, lending through a group is more effective in dealing with asymmetric information than in individual lending. At the commune and microcredit institution levels, the process of lending and monitoring VBSP credit is rather stringent (Nguyen, 2008). To ensure high repayment rates in the system, the VBSP monitors

outstanding loans and overdue outstanding loans from its local branches. It corresponds to the overdue outstanding loans with fund allocation every year, i.e., less funding to VBSP

branches with large overdue loans. In addition to the credit groups the People‟s Committee is also administratively responsible for the repayment of credit group members in their

commune. Often, when the applicants list is ratified, the People‟s Committee tends to exclude very poor households who might not be able to repay loans but non-poor or even better-off households can get loans (Dufhues, Pham, Ha, & Buchenrieder, 2001). Therefore, the poverty targeting of the VBSP program remains questionable.

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Nguyen (2008) employs the World Bank–GSO poverty line to investigate how well the microcredit programme reaches the households. The results revealed that, in 2004, only 12% of the poor households with a favourable credit record obtained loans from the microcredit programmes provided by VBSP. The evidence strikingly indicates that the lending rate of microcredit programmes was significantly low. In addition, the poor usually receive smaller amounts of credit than the non-poor. The loan size per poor borrowing household was 3.174 million VND, which was rather lower of 3.715 million VND that a non-poor household borrowed on average.

Two main reasons explain why microcredit programmes did not reach the targeted poor households. First, the poverty targeting issue has difficulty in identifying the real poor. In

Vietnam, the poverty definition is not consistent between the GSO-WB approach6 and local

authorities (Nguyen, 2008). At the commune level, a household is classified as poor if it is considered lacking food or is living in a damaged house while its income lies below the income poverty line constructed by the Ministry of Labour and Invalid Social Affairs

(MOLISA). The criteria are set up by each commune and they can differ from one commune to another. Because of the inconsistent definition of poverty, the only way to differentiate the poor from the non-poor is principally the instinctive judgement of local officers who often have an obscure and varied understanding of the poverty line set by the government. Thus, it is difficult to monitor the delivery of the subsidised loans to ensure that the loans actually reach the poor.

In addition, the non-targeting issue, in which much of the benefit from the subsidised microcredit program is enjoyed by the non-poor rather than the poor, has also contributed to the failure of these programmes. Nguyen (2008) showed that the VBSP programme‟s

coverage rate for middle and high income groups was 7.3% and 2.3%, respectively. The non- targeting issue in Vietnam was similar to that of China‟s subsidised loan programmes in the early 1990s. Rozelle, Zhang and Huang (2003) revealed that over 90% of loans in China in the early 1990s were invested in industrial production instead of agricultural production. Bias in loan allocation and profit concerns are the main reasons that prevented banks from

delivering subsidised loans to the poor from microcredit programmes (Li, 2010).

6

GSO-WB approach follows the international poverty line which set a minimum income 1.25 USD a day per person.

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The second reason related to asymmetric information in selecting the borrowers in a poverty targeted microcredit programme is reported in Dufhues et al. (2001) study. The authors reported that due to high costs related to lending and monitoring process, credit groups and commune heads are reluctant to include poor households in the list of credit applicants. Since commune heads are involved in the screening process and they receive incentives based on the credit volume and repayment rate in the commune, the commune heads also involve in the reinforcement of the repayment of overdue loans. This is an unpleasant duty which the

commune heads try to avoid. Therefore, they are more likely to select households that may not be poor according to the national criteria but have a credit demand with potential repayment. The poor are excluded because they are assumed to have a low repayment capacity. Meanwhile, non-poor households find it easier to obtain credit because they are expected to be more reliable in using credit effectively and repaying credit. In addition, the poor often have low levels of education, limited production skills and market information. They also tend to apply for smaller credit amounts than the non-poor.