The impact of digital transformation on credit risk of commercial banks in Vietnam

Abstract

In Vietnam, digital transformation has been considered as the leading strategy of commercial banks, especially in terms of credit risks. Therefore, they must identify how their digital transformation affects their credit risks to maintain effective operation and steady growth in a complex and changing market environment. Our study takes 29 commercial banks in Vietnam from 2014 to 2022 as the research object to test the impact of bank digital transformation on credit risk. In particular, the level of digital transformation of banks is measured by the ICT Index. The ICT Index is the official measure that evaluates the level of information technology application nationwide each year, with separate indicators for ministries and branches. Banks in Vietnam also use the ICT Index to assess their readiness and ability to apply information technology in the digital transformation process. Various regression models including Pooled Ordinary Least Squares (OLS), Fixed Effects Model (FEM), Random Effects Model (REM), Generalized Least Squares (GLS) are applied using STATA 17. Research results show that credit risk is affected by 5 factors: the information technology development and application readiness index (ICT Index), inflation rate (INF), return on equity (ROE), loans to customers (LOAN), and operational diversification (NIIC). On that basis, the study proposes recommendations for commercial banks to promote their digital transformation process. In addition, the state and policymakers also have appropriate measures to promote digital transformation in the Vietnamese banking system.