Non-Performing Loans of Commercial Banks, and Their Causes: Evidence from Vietnam

Duy Suu Nguyen,Quy Hao Nghiem,Thanh Nhan Do

doi:10.55579/jaec.202154.326

Abstract

Non-Performing Loans (NPLs) are a significant issue for all banks in Vietnam, attracting considerable attention from scholars. Our research aims to nd out the factors that affect the NPLs of Vietnamese commercial banks. The study uses Pooled Ordinary Least Square (OLS), Fixed effect, Random effect, and Generalized Least Square to examine secondary data of 28 commercial banks annually for the period 2008-2019. Consistent with previous research, the main finding shows that macroeconomic and microeconomic factors impact NPLs. Remarkably, provision for credit risk (PCR) has a significantly positive effect on the NPL ratio. Besides, foreign investor ownership (FOR) and bank size (SIZE) negatively affect the NPL ratio. Especially, for the positive correlation between foreign investor ownership and bank performance, the commercial bank should expand to enhance operational efficiency. Regarding macro factors, the results conclude that gross domestic product (GDP) growth and the unemployment rate (UEP) have a significantly negative relationship on NPLs. Therefore, the State Bank of Vietnam and the banks need to understand the leading causes as they directly relate to the banks in the context of the prevailing economic environment.This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium provided the original work is properly cited.

Highlights

Non-Performing Loans (NPLs) have a close relationship with bank losses, increasing non-performing loan (NPL) is reected in weak credit risk management, leading to credit management costs and losses [1, 2]
We used the Redundant Fixed Eects test to select whether the Pooled Ordinary Least Square (OLS) or the Fixed Eects Model (FEM) is more suitable for goals of the data
The regression coecient of the provision for credit risk (PCR) variable is 0.5756, indicating that when the credit risk provision ratio of commercial banks increases by 1%, the non-performance loan ratio increases by 0.5756%

Summary

Introduction

Non-Performing Loans (NPLs) have a close relationship with bank losses, increasing NPLs is reected in weak credit risk management, leading to credit management costs and losses [1, 2]. Louzis et al (2012) [3] suggested that a bad debt increased due to weak credit management capacity. Macro factors such as growth, unemployment aected NPLs. NPLs arise in dierent stages, when the economy falls into a state of saturation or downward trends, NPLs tend to increase. According to Dimitrios et al (2016) [4], the bank's operational eciency decreased because of the impact of NPLs. Besides internal factors of banks and macro policies or nancial policy have a signicant impact on NPLs [4, 5]

Methods

Results

Discussion

Conclusion