Factors Affecting Loan Loss Provisions during the Covid-19 Pandemic – The Case of Commercial Banks in Vietnam

Abstract

Credit is considered a crucial activity of commercial banks; it accounts for the most significant proportion of the bank's total assets and is also an activity that carries great risks. The study uses OLS, FEM, REM, and FGLS to assess the factors affecting loan loss provisions (LLPs) of 20 Vietnamese commercial banks during the Covid-19 pandemic from Q1/2020 to Q4/2021. The result of the model is based on FGLS to overcome the phenomenon of heteroscedasticity after using estimation by OLS, FEM, REM, showing that the factors affecting LLP of Vietnamese commercial banks during the Covid pandemic include: bank size (SIZE), non-performing loans ratio (NPL), a ratio of pre-tax profit and provision to total assets (CROA), loans to total assets ratio (LOAN), and credit growth (ΔCREDIT). Research results using the FGLS method show that bank size, bad debt ratio, pre-tax profit ratio and provision to total assets and credit growth positively impact the LLP of the Vietnamese commercial banks in the Covid pandemic. However, interestingly, the percentage of loans to total assets can decrease the provision for loan losses. Thereby, the study proposes some policy implications as follows: The SBV needs to have the policy to limit credit growth and bad debt ratio for commercial banks to control the competition for a market share of loans without ensuring the quality of loans, leading to an increase in credit risk and LLP. Furthermore, each Vietnamese commercial bank needs to develop and apply a practical and comprehensive credit process to ensure debt recovery to avoid a lot of bad debts. For new customers, banks need to fully assess all aspects to predict the level of risk before deciding to provide loans. Additionally, the long-term effects of Covid-19 cause difficulties for commercial banks' activities, SBV needs to consider supportive policies through interest rate reduction, grace period, and debt extension to increase financial performance and maintain market share and profits of commercial banks.